Fred Reichheld

Good profits are earned from customers who would recommend you to a friend; bad profits come from angry customers who would recommend that friends stay away from you. Both can look completely legitimate in the eyes of accepted accounting methods, but one creates healthy business growth while the other will destroy growth.

"Net Promoter" is a discipline you defined at Bain to help companies focus on loyalty. What problems does this discipline address?

Statistics like customer retention rates and wallet share are sufficient for research, but it's too hard to get those numbers for ongoing dashboard items that people are held accountable for on a daily or weekly basis. We began searching for a simple, timely gauge and ended up with what we call the "ultimate" question: How likely is it that you'd recommend this product or service to a friend or colleague? The Net Promoter Score (NPS) helps companies not only predict where growth could occur but also discover how they can improve their results. At General Electric, management is implementing Net Promoter scores across all U.S. lines of business and reporting the scores to all stakeholders. GE execs call NPS their next Six Sigma--but for managing outside the confines of the business.

With information at their fingertips over the Web, customers are changing the power balance. How does this affect the dynamics of loyalty?

In the past, a lot of so-called loyalty was simply customer ignorance. That's why retention remains an insufficient measure; people stay because they lack the knowledge to go to a competitor. The Internet is a threat to false loyalty; it is a powerful tool to help you build true loyalty. With e-mail, managers can get into a dialogue with customers. Rather than just get results from some black-box market research tool, they can find out why a customer gave a particular score and dive into root-cause analysis in a practical and economical way.

Is customer service the focus of most loyalty efforts today?

Customer service is important, but people are mistaken if they separate this from product quality and economic factors. If corporate executives decide to do something that makes customers livid, how can you hold front-line service people accountable? How can you have good customer service if those employees are embarrassed by policies that determine how customers are treated?

Loyalty comes down to the Golden Rule: treat customers and partners the way you'd want to be treated. Too often, companies measure what is easy to measure rather than what's important to measure. What's not being measured is how well your company is living up to the Golden Rule. Until you can put metrics and performance measurement in the same breath with the Golden Rule, definitions of what drives loyalty won't have much rigor or meaning.