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March 27, 2008
Mouthonomics
A new study from Satmetrix provides some new numbers on how customer evangelists can help grow your business. And how customer vigilantes can hurt it.
The study examined customers in the computer hardware industry and found, using the Net Promoter methodology, that "promoters" would spend about $1,818 of their own money and refer an additional $816 of revenue from friends and associates.
That means a customer evangelist helped inspire sales that was nearly equal to 50% of what she'd purchased.
Some quick math shows the potential of customer evangelists more dramatically: Let's say a business has 1,000 evangelists whose average purchase during a period of time is $1,818. That means the group will have spent $1.8 million of their own money and referred $816,000 of business for a total of $2.6 million. Very quickly the cost of goods sold begins to decline while gross margins go up.
Satmetrix found that detractors (or customer vigilantes, as we like to call 'em here) spend a little less, but their bad buzz caused lost sales amounting to $1352 per detractor, nearly negating any of their actual value as a customer.
The bottom line with evidence like this: diligent listening is key. It's imperative to know whether customers are referring you or bad-mouthing you.
The talkative ones are the leading indicators of your future.
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Great post.
I wonder how this translates to CommGen (community generated media)? How important is a viral spreaders (major nodes on Digg, StumbleUpon and the like) vs. the negative feedback?
Jackie,
One of the things we found in our Tuned In research was exactly where you are leading with this. Companies that are 'tuned in' are 31% more profitable in a large part because they have these high referral rates. We found companies that had 80%+ of their business through referrals from the types of evangelists you cite (the visual of Apple jumps to mind and yes they were on the list).
The correlation back was not to marketing technique or service orientation but to creating a product or service that people wanted to buy. Sounds simple and obvious but the thing that these businesses really did differently was being really connected to the 'problems' their target buyers had and building solutions to those problems that were quantum leaps in the overall impact scale.
NetPerfomer is a great way to get at a core metric of how well you are doing and how predictable your growth rates will be. Cisco actually compensates based on incremental gains because they know how big the impact is on the bottom line.
Anyway, loved the post. Thanks.
Dave,
I've not seen a similar study for CGM. But in general, knowing what percentage of your customers recommends you and what percentage recommends against you is a good thing to determine.
Jackie
I agree with your point and clearly evnagelists have additional value but your quick math is a bit simplistic. Since some of the referrals will actually be evangelists themselves, you can't simply add the whole $800K on top. Also a key is to make sure that the evangelists aren't referring vigilantes!!
While NPS is an ok snapshot it is not a better indicator of firm financial performance than customer satisfaction or loyalty scores as the source claims. In addition the sample size needs to be 20 times the size to get the precision of customer satisfaction.
I highly suggest reading some of Gina Pingitore's research on the subject. Check out last summer's Marketing Research article.
Jackie,
Very helpful.
Try adding this research with harvard's CLTV and the benefits for the business become even more tempting for companies to invest in "breeding" or building brand loyalists.
http://www.harvardbusinessonline.com/flatmm/flashtools/cltv/
Jackie,
That's a very powerful chart. Thanks for bringing it to our attention! I'm off to check out Satmetrix now.
Regards,
Kelly
I'm digging where you're going with this. Net Promoter, customer evangelism, ROW (return on word...), all leading to the impact on the company's bottomline. That's what sold us on the notion. And it worked.
Thanks.
It's been awhile since I've seen a study that puts the dollar figures to the information that I've known to be true. Thanks for sharing this. I'm adding a reference to this post at my blog at www.sclohonet.blogspot.com
Interesting statistics, thanks.
There was a useful article in the Harvard business Review last year about Customer lifetime value (CLV) and Customer referral value (CRV) and how to increase both. didnt talk about the vigilantes though.
The figures for detractors are interesting. Personally I would cease spending on a brand i did not love and then detract. Odd that people would continue to spend their own money on something they did not love? Perhaps they had no choice like a utility provider or similar?
Mike Ashworth
Jackie
I was lucky enough to get hold of the white paper with the details in. But I was staring at the graph for ages before I found that there muse be an error in it. Sorry to pick holes SatMetrix, but the far right bar does not go below the line. Actually it ends up with customer value of +$105, still pretty miserable, but not negative.
Unless I am missing something, I'm hoping that SatMetrix are better at math than in their white papers... :-)
Adam
