Satmetrix, the leader in enterprise customer loyalty solutions, released a study today that examines the financial impact of positive and negative customer word of mouth (WOM). The study, Net Promoter Economics: The Impact of Word of Mouth, is the second in a series and highlights the business-to-consumer (B2C) credit card industry.
"Given the current economic conditions and, in particular, the credit crunch, credit card companies need to focus more than ever on retaining their best customers and improving customer loyalty," said Richard Owen, chief executive officer of Satmetrix. "This study illustrates how companies with business models built on bad profits are particularly exposed during tough times, and need to take a good, hard look at how customer loyalty is affecting their bottom line."
Using Net Promoter®, the Satmetrix study illustrates how customers impact the bottom line through their buying and referral behaviors. Co-developed by Satmetrix and Fred Reichheld, author of the "The Ultimate Question," Net Promoter enables companies to categorize customers into "Promoters" (those who are highly likely to recommend a company and/or its products) and "Detractors" (those who are unlikely to recommend a company and/or products). The result is a single metric that serves as an indicator of customer loyalty and long-term growth.
Building on Net Promoter, Satmetrix has developed the Net Promoter WOM Economic Framework, which determines total customer value based on buyer and referral economics. Buyer economics refers to how much a customer spends over a given period of time, while referral economics refers to the amount of new business that is gained or lost as a function of what the customer tells others about their experience.
"The Net Promoter WOM Economic Framework helps to illustrate the utility of the Net Promoter Score as an indicator of customer behaviors which have a critical impact on a company's current and future business performance," said Dr. Vince Nowinski, director of methodology at Satmetrix.
Applying this framework to the credit card industry, Nowinski and his team discovered that each Promoter spent $19,786 over the previous year, approximately $2,500 more than the average customer spend of $17,319. In contrast, Detractors spent an average of $13,912, approximately $3,400 less than the average customer. What's more, Detractors can compound the loss of revenue through negative word of mouth. The study estimates that each Detractor will cost their credit card provider $7,690 in lost revenues by virtue of the influence of their negative word of mouth.
The impact of word of mouth is clear when comparing American Express and Capital One. American Express enjoys loyalty leadership, with the total customer worth"”including purchase value and referral value"”of their Promoters averaging nearly $30,000. Capital One Promoters, on the other hand, have an average total customer worth of less than $13,000. Additionally, Capital One suffers from a high proportion of Detractors in its customer base who subtract more than three quarters of their revenue value through negative word of mouth.
"It is clear that, in the long run, customers value and remain loyal to a company based on positive experiences rather than clever marketing campaigns," said Dr. Laura Brooks, vice president of business consulting and methodology for Satmetrix. "In turn, these loyal customers provide an efficient, low-cost acquisition engine through their own positive referrals. Adapting a stronger customer-centric focus pays clear dividends in terms of customer spend, tenure, and word of mouth."
About the Survey Methodology
Data used for this study originated from the Satmetrix Net Promoter Benchmark Database - an ongoing, opt-in benchmarking effort that collects primarily U.S.-based data for the B2C and B2B markets, four industries and 14 segments, including the business-to-consumer credit card industry. Opt-in respondents self select the industry and company they wish to rate using a 0-10 point scale. Key metrics include Net Promoter, other industry standard loyalty measures, self-reported spend and referral behaviors, as well as various company performance attributes, such as satisfaction with overall product, value, reputation, ease of doing business, etc. Consisting of almost 285,000 responses collected over a period of seven years, the Net Promoter Benchmark Database is a rich data source that provides industry reporting and analysis within a competitive context.
About Satmetrix
Satmetrix is the leading global provider of on-demand software applications and consulting services to measurably improve customer loyalty and link these results to financial benefits. As the co-developer of Net Promoter®, the company's solutions enable companies to gather trustworthy data on customer experience, derive actionable insights, integrate this information into the daily work flow of employees and establish an ongoing dialogue within the customer community. The company has deployed more than 700 enterprise solutions in 40 languages. For more information, visit www.satmetrix.com, or call 1-650-227-8300 in the US or +44 (0) 845-371-1040 in the UK and Europe.
Net Promoter and NPS Net Promoter Score are registered trademarks of Satmetrix Systems, Inc., Bain & Company, and Fred Reichheld.