Paula: Welcome to Let’s Talk Loyalty, an industry podcast for loyalty marketing professionals.
Paula: I’m your host, Paula Thomas.
Paula: And if you work in loyalty marketing, join me every week to learn the latest ideas from loyalty specialists around the world.
Paula: So, welcome to episode 42 of Let’s Talk Loyalty.
Paula: And I’m delighted today to be talking to Rob Markey, who is a partner and director at Bain & Company.
Paula: And many of you will know the work of Bain, even if you don’t know if it’s directly attributable to them.
Paula: But all of us have talked excessively about the Net Promoter Score and Net Promoter System that we all know and love.
Paula: And in fact, it was Bain & Code that developed that entire concept many years ago.
Paula: So Rob is here to talk to us about everything to do with Net Promoter Score, Net Promoter System, and also some more important principles that Bain & Code are working on more recently than that.
Paula: So first of all, Rob Markey from Bain & Company, welcome to Let’s Talk Loyalty.
Rob: Thank you so much, Paula.
Rob: It’s really nice to be here.
Paula: Great.
Paula: And what I should also tell listeners first and foremost, Rob, is I thought I might have been one of the first podcasters about loyalty until I realized I think you have 181 episodes of your own show, which we’ll make sure that we talk about as well.
Paula: So I know you’re an avid podcast listener and creator, so super happy to be talking to you today.
Rob: Thank you so much.
Paula: Great.
Paula: So first of all, as you know, Rob, we always start this show talking about our favorite loyalty statistics.
Paula: And I know you’re just coming up to 30 years, in fact, with Bain & Co.
Paula: So with all of that incredible experience, I’m really curious to hear, what is your favorite loyalty statistic?
Rob: So my favorite loyalty statistic is one that I only recently discovered.
Rob: And I discovered it out of the sort of back of the mind curiosity that I had for a really long time.
Rob: And here it is, two thirds of the companies that are what we would term enduring loyalty leaders, companies that lead their industry objectively in customer loyalty over more than three plus years.
Rob: Two thirds of those companies are either owned by their founders, owned by the descendants or run by the descendants of the founder or owned by their customers.
Rob: They’re private, they’re not publicly controlled.
Rob: Only one third are independent, publicly traded companies.
Paula: Wow.
Paula: Okay, that’s a phenomenal statistic.
Paula: So I know, for example, that as Bain & Company, you do a lot of advisory work, particularly with Fortune 1000 companies.
Paula: And there was a really good statistic actually as well that I saw where the net promoter scores used by two thirds of those companies.
Paula: But really intriguing to look at the relationship between the owners or the ownership, I guess, and how that’s translating into leadership.
Rob: You know, it was a hunch that I had for a long time because in the early days of looking at this stuff, our best examples, the companies that we admired the most were companies like USAA, Vanguard, Chick-fil-A, Enterprise, Rent-A-Car, even at the time Southwest Airlines, which was still run by Herb Kelleher.
Rob: He passed away about a year ago, but he, you know, all of these companies, Nordstrom, all of these companies, even if they’re publicly traded, are still largely controlled by or influenced by the founder.
Rob: And there’s something at Bain we call the founder’s mentality.
Rob: It’s a concept that describes how founders think about and lead their companies and really tries to describe the difference between a founder led firm and a firm that’s, quote, professionally managed.
Rob: Some of the problems and issues that arise as you get bigger and as you get more bureaucratic and more structured.
Rob: And I actually think that there’s something to that with regards to loyalty leaders that even when they’re big and even publicly traded companies as loyalty leaders, they seem to maintain that founder’s mentality.
Paula: I love it.
Paula: So it sounds like, and I know, for example, Rob, you created the firm’s global customer strategy and marketing practice pretty much 30 years ago.
Paula: So incredible to see that thinking coming through over time.
Paula: And I do want to talk about the origins of Net Promoter Score and how you guys developed that.
Paula: But is that one of the leading insights that you’re, I suppose, talking to chief executives about right now to rediscover that founder’s mentality and to bring it back?
Rob: It absolutely is.
Rob: Yeah.
Rob: Because it’s really when you’re a small company, I’m the grandson of what’s called a meat provisioner, a company that sells meat wholesale to restaurants and hotels and stuff.
Rob: And I worked for my grandfather during the summers, and he knew every customer.
Rob: He knew all about their business.
Rob: He knew what they wanted and needed.
Rob: He talked to them.
Rob: And even as his business grew, he knew every one of them.
Rob: When you’re a big company, obviously the CEO can’t know every customer and be in dialogue with them every week.
Rob: And in fact, the bigger you get, the more alienated you become from employees and from customers who are at the front line.
Rob: And so I think it’s kind of natural that it’s difficult to maintain customer intimacy as you get bigger.
Rob: And what I now realize looking backwards, I don’t think that I set out this way when I started, but a lot of my career has been about bringing that small company intimacy to large organizations.
Paula: And I was reading some of the articles that you wrote recently, Rob, and there was a really good example that you might talk about now around a logistics company.
Paula: And it was exactly this idea of, you know, I can hear, you know, that’s totally one where you can see the problem.
Paula: It’s so obvious as a customer to understand that the company got so big, so departmentalized and so siloed that they completely lost sight of what the customer needed.
Paula: So would you talk through that example?
Rob: Well, I want to emphasize, Paula, that the way they got there was actually very well intentioned.
Rob: And it wasn’t like it’s really easy to look at these things and be super critical and say, my God, these people are idiots.
Rob: Can’t they see this?
Rob: When in fact, the way that it occurs is sort of natural and human and unintentional.
Rob: In fact, maybe the opposite.
Rob: It’s intentional in a slightly misguided way.
Paula: Yes.
Rob: So this is a company where they transport millions and millions of packages all around the world.
Rob: And one of the things that has always been a persistent issue in the shipping industry is damage.
Rob: Things get damaged in transit.
Rob: And this company was experienced that like every other company does that’s in their business.
Rob: In an attempt to deal with that, each department, each functional group did their job exceptionally well.
Rob: So the people in sales were like, hey, we got to fix this damage problem.
Rob: And they were kind of trying to smooth things over with the customers.
Rob: The people in customer service were like, hey, we got to reduce our costs.
Rob: It’s really expensive to handle a claim of damage.
Rob: And so we got to do things to make this take less time for us.
Rob: The people in risk management who are responsible for paying the claims were like, our claims costs are going through the roof.
Rob: We’ve got to control these costs.
Rob: The people in operations were like, hey, you know, a very, very small percentage of all packages actually gets damaged in transit.
Rob: So let’s make a rational decision from our perspective about how much accommodation to put for packages that typically get damaged versus other ones.
Rob: So every department was doing their job really well and meeting their goals.
Rob: What ended up happening is that the customer lost in the mix because the sales guys actually said, you know, we got to take any package that a customer gives us, even really big, heavy ones.
Rob: The guys who are responsible for receiving and shipping those things said, it’s super expensive to pull the big packages and heavy packages out of the stream and handle them differently.
Rob: And we’re not getting the revenue for doing that.
Rob: So we’re going to just handle the big packages all in stream with everything else.
Rob: When those packages are in the back of a truck, the big ones crush the small ones.
Paula: Yeah.
Rob: The customer service guys were like, hey, we should make it, like we should try and get people off the phone as quickly as possible.
Rob: Yeah.
Rob: And we should take, we should actually make them go through a whole series of self-service steps with push button voice response before they ever get to a live wrap so that we reduce the cost of these very expensive phone calls.
Rob: And then the risk management guys were like, we need to tighten our criteria.
Rob: We need the customer to prove that their package was damaged because a lot of times they have a box that’s ugly, but the stuff inside is great.
Rob: And so we need them to prove that their stuff was damaged.
Rob: And so everybody’s metrics went the right direction.
Rob: The sales guys were able to sell more.
Rob: The operations guys cut cost in the operations.
Rob: The call center guys cut cost.
Rob: The claims risk management team saved money.
Rob: And then the experience for the customers was miserable.
Rob: More packages got damaged.
Rob: You couldn’t get a rep on the phone to take your claim.
Rob: And if you did, the chances of getting it paid were zero because you basically had to go through an 18-step process to demonstrate what you had lost.
Rob: It was just crazy.
Paula: So how did they fix that problem, Rob?
Rob: Well, a couple of things.
Rob: First of all, we had to step back and say, what is the customer experience here?
Rob: And how does that actually play through?
Rob: And how do we adjust the both perspective, like the human experience of the people in the organization so that they could see how the customers experience it?
Rob: And the budgets and the incentives.
Rob: And when I say incentives, I don’t mean the pay.
Rob: I mean the metrics, goals, the instrumentation of the business so that you could see the impact of doing these things on customer relationships and their value.
Paula: Okay, yes.
Paula: And to your point, well-intentioned, operationally efficient, but only in individual departments and in silos.
Paula: And it comes, I suppose, to the key metric that you guys created and developed for us as an overall industry.
Paula: So tell us, how did the whole work about measuring customer experience in the form of Net Promoter Score, how did that whole framework evolve?
Paula: So tell us the story.
Paula: I know it was yourself and Fred Reichheld.
Paula: So tell us, where did Net Promoter Score come from?
Rob: Well, Net Promoter actually was the natural evolution at Bain from a desire to create a way of balancing the short-term profitability-driven metrics of a business towards customer value.
Rob: And we actually started way back in the late 80s, early 90s when I joined the firm with customer retention.
Rob: And Fred Reichheld, who I actually joined Bain to work with.
Rob: Fred had published an article while I was in business school about customer retention and the value of customer retention.
Paula: Yes.
Rob: And it resonated with me because prior to business school, I had had a job where we had lost a lot of customers.
Rob: And I don’t think the executive team really understood the impact of that.
Rob: When we were working with that in the 90s, what we realized was that retention itself is an important, important metric, but it’s very, very late in the game.
Rob: By the time a customer attrites or leaves you, many, many things have happened way before that.
Paula: Yeah.
Rob: And so we started to say, well, we need something that’s more predictive rather than backward looking.
Rob: And we developed these models based on customer research that would allow you to predict attrition.
Rob: So is this customer likely?
Rob: And even at the survey level, we could see different populations of customers, whether they were more or less likely to attrite.
Rob: And it was based on a series of questions that had to do with your satisfaction, product quality, the service quality and so on.
Rob: And the more questions we asked and added into the index, the more precise our predictions were.
Rob: That was really the state of the art during the 90s actually improved a lot.
Rob: What didn’t improve was the extent to which companies acted on the metrics that we gave them.
Rob: And that was super frustrating.
Rob: I was like, what the heck?
Rob: Why are they not doing anything?
Rob: We’ve got very precise predictions of what’s going to happen.
Rob: Wow.
Rob: And so it led us down this path and especially Fred.
Rob: I have to credit Fred with this.
Rob: Trying to find out what was different about the companies that were acting on the feedback versus the companies that weren’t.
Rob: And the epiphany came when Fred was talking to the executives at Enterprise Rent-A-Car, who the CEO at the time, a guy named Andy Taylor, again, founding family.
Rob: Andy said to Fred, you know, you’ve got these fancy metrics that are super complicated, and all they do is generate lots of analysis.
Rob: Everybody wants to pick them apart.
Rob: Well, what about that?
Rob: What about this?
Rob: Can you cut it this way?
Rob: Can you cut it that way?
Rob: He said, the way I solved it here is I just went back to one single question, and then I gave the feedback directly to the people who needed to do something with it, and I held them accountable to do it.
Rob: And that led to this sort of epiphany.
Rob: It’s like, oh man, sometimes in order to know more, you have to ask less.
Rob: And sometimes in order to get to real action, you have to simplify things down to their core.
Rob: And so we went on a search for, you know, if you were going to ask just one question, what question would you ask that would best give you the ability to differentiate between customers who are going to stay longer, buy more, tell their friends, be lower cost to serve, and customers who are not?
Rob: And so we tested all these different questions.
Rob: The question that emerged was, how likely would you be to recommend, you know, my company to friends or colleagues or family members?
Rob: And then we further discovered that if you expanded the scale, typically the response scales were 1 to 5 or 1 to 7.
Rob: And we found that we had a problem, which was on a 1 to 5 scale, the fives are basically not that differentiated from the fours.
Rob: And the difference in value between people who give you five and the average customer in your population was very small.
Rob: So when we expanded the scale, the more we expanded the scale up to a certain point, the better differentiation we got at the top end.
Rob: And that’s what led to this idea about promoters versus passively satisfied customers versus detractors.
Rob: So we use a zero to 10 scale.
Rob: The nines and tens turn out in general.
Rob: It’s not always exact, but to be promoters, they buy more, stay longer, tell their friends.
Rob: The zeros through sixes in general tend to be detractors.
Rob: And the people who were fully satisfied, they would give you a five on a five scale, but aren’t necessarily going to take action to help you grow your business, aren’t going to stay with you even if you make a mistake.
Rob: Those are the passives, passively satisfied, seven and eight.
Paula: Yeah.
Rob: And so, you know, and then we evolved it.
Rob: We actually realized that simplifying that even further down into a net score was really valuable for just making it really clear how to compare things.
Rob: And we came to that when we were trying to predict the growth rates of different companies in the same industry, comparing net promoter scores, double blind research methodology.
Rob: We were trying to compare them.
Rob: And when we did it on like, you know, average likelihood to recommend, we didn’t get that much discrimination.
Rob: But when we did this subtraction, promoters minus detractors, we actually started to see the correlation emerge.
Rob: High net promoter score, promoters minus detractors, grew faster than low net promoter score.
Rob: And in fact, in industry after industry, you could explain somewhere between 20 and 60% of differences in competitive growth rates simply on the basis of their net promoter score.
Rob: I think it’s on that basis, that the predictive capability at the industry level and the intuitive simplicity of it at an individual level that net promoter got popular.
Paula: Yeah.
Paula: And I know the article that you mentioned, Rob.
Paula: Thank you for that detailed explanation.
Paula: It’s extraordinary to hear the story coming through because again, we all know the metric and you never think about the history.
Paula: But Bain has become, as we said, synonymous with that.
Paula: So incredible to see.
Paula: And I did read that article that Fred wrote.
Paula: I presume it’s the one.
Paula: It’s called The One Number You Need to Grow in Harvard Business Review back in 2003.
Paula: And I know yourself and Fred went on then to write a book together called The Ultimate Question 2.0.
Paula: So I will ask you a bit about that.
Paula: But before I do that, Rob, one of the things that even researching for today that really intrigued me was why do some industries even still have a negative score?
Paula: So that was super confusing.
Paula: I was looking at some of your articles and the most highly rated net promoter score in drugstores, for example, was quoted as Walgreens at a minus four.
Paula: So I’m like, does that mean we just don’t care about drugstores?
Paula: Or, you know, if that’s the best in the industry, like, where can you go from there?
Paula: Or why is it that some industries can’t get to a positive or don’t seem to as yet?
Rob: Yeah, it’s something that, first, it’s important to remember that because you’re subtracting promoters or detractors from promoters, the net promoter scores go from negative 100, everybody’s a detractor, all the way to positive 100, everybody’s a promoter.
Rob: And so when we’re used to things that only go from zero to 100, we’ve doubled the distance on this scale.
Rob: You kind of have to keep that in mind.
Rob: Obviously, when you’ve got a negative net promoter score in an industry, you’ve got more detractors than you have promoters, and it’s really usually an indication that an entire market is being underserved by the incumbents.
Rob: And it almost always is a good indicator that within the next five or ten years, somebody’s going to enter that business with a different business model that is going to at least challenge, if not unseat, the incumbents.
Rob: Okay.
Rob: Take the example of telecom.
Rob: In most telecom markets around the world, and telecom is generally reasonably local, right?
Rob: Especially in the old days, you had a physical infrastructure that was very, very specific.
Rob: It’s evolving over time, but in most markets, the best in the industry was at or below zero.
Rob: It’s largely a function of the fact that with very limited competition historically, these companies didn’t have to focus a lot on satisfying their customers or wowing them.
Rob: They could basically get by with the minimum necessary to keep the regulators off their back.
Rob: Okay.
Rob: As competition has opened up, you can see market after market, the average and the best in the industry, net promoter score has climbed little by little by little.
Rob: In the 20 years or so I’ve been looking at it, you’ve seen market after market, the US, Brazil, Australia, markets in Europe, those scores climbing for both the leader and then ultimately for the other competitors as they get better.
Rob: I think that competition turns out to be a pretty good thing.
Rob: Same thing happened in electric utilities.
Rob: It generally is a pattern of competitive intensity.
Rob: I always like to say you can be the highest in your industry.
Rob: That’s great.
Rob: You’re going to outgrow your competitors over the long run.
Rob: But if you’re the highest in your industry and you’re still negative or even below 20, my guess is that somebody’s going to figure out how to serve your customers better than you’re doing.
Paula: Yes.
Paula: And it may be that COVID is exactly the type of trigger.
Paula: So the current market environment is exactly where unexpected substitutions and different business models are emerging.
Paula: So we might try and touch on that at some point as well.
Paula: I just wanted to say as well though, Rob, what I loved when researching the net promoter score initially, what I really loved about the nuance of how the question was chosen, because I know you looked at lots of possible single questions, as you said, but it was almost the fact that you’re putting your own reputation on the line.
Paula: And that’s why that question became the most powerful one, because we’re all complacent, I guess, sometimes lazy, in terms of how we behave.
Paula: So, as you said, passively loyal.
Paula: But if I’m going to say to my friend or my husband, yes, this is something I recommend, then my reputation is actually vulnerable.
Paula: So I love that nuance behind it.
Paula: So I really think it’s a genius piece of work.
Paula: And I know the article in Fortune magazine recently said exactly the same thing in the last 17 years.
Paula: No other question has come through as more effective at measuring loyalty.
Paula: So I can imagine how proud you are of the work that you and Fred have done.
Rob: Well, thank you.
Rob: I still like to say that Net Promoter is the worst customer metric ever invented, except for all the others that have been tried.
Paula: I love it.
Rob: I say that half joking.
Rob: It’s paraphrasing Winston Churchill, who said that about democracy.
Rob: I think that it’s still very imperfect.
Rob: It’s still not.
Rob: There are lots of people who have all kinds of criticisms about it, mostly because they misuse it or it is misused around the world.
Rob: I think that the reason that it has endured or one of the reasons it has endured is because we never tried to fully control the methodology and keep it tightly controlled by Bain.
Rob: We always wanted it to be improved by the community.
Rob: Over that time, a ton of innovation has happened around Net Promoter.
Rob: It seems, how could you innovate around one single question?
Rob: Actually, the methodology for collecting feedback, for handing it to individual employees who need to hear it, for following up on it, all those things have been developed and improved and improved by the whole community of companies that are using Net Promoter.
Rob: They’ve been very generous in sharing their experience in places like the NPS Loyalty Forum or with some of the articles and podcasts that we’ve shared over the years.
Rob: It’s a wonderful community of practitioners who teach us every day how to do it a little better.
Paula: Wonderful.
Paula: And I love that you’re still looking to do it better.
Paula: What I’d love to ask next, Rob, is just the subtle difference between Net Promoter Score and Net Promoter System.
Paula: And I know your podcast is called Net Promoter System, which is possibly why I didn’t pick it up immediately when I was searching for other podcasts.
Paula: So will you just explain the evolution of the thinking from one terminology to the other?
Rob: Well, you say it’s subtle.
Rob: It’s maybe subtle grammatically, but it’s not subtle in terms of its impact.
Rob: Net Promoter Score is a metric.
Rob: It is a metric that, like any metric, can be mismeasured, misused, misapplied.
Rob: What we were trying to predict with Net Promoter Score was the behavioral drivers of customer lifetime value, something I know you talked to a colleague of mine, Pete Fader, about in a prior episode.
Rob: I think that it’s often confused, people often confuse Net Promoter Score with the objective.
Rob: The objective is not to improve your Net Promoter Score.
Rob: The objective is to earn more loyalty from your customers.
Rob: In doing so, to earn more of their business, to get them excited about staying longer with you, and to get them so excited about your business that they’re rooting for your success and telling other people.
Rob: That’s the goal.
Rob: Improving your score is only an indication that you are doing that.
Rob: It’s only a good indication if you’re measuring appropriately.
Rob: The system is about three primary things.
Rob: Number one, the system is designed to help improve the relationship between your company and your customers.
Rob: There are a lot of implications of that, but even the way that you collect feedback from customers should, in itself, enhance that relationship.
Rob: I think a lot of companies lose sight of that.
Rob: They get too focused on, I need to know what I want to know, when I want to know it.
Rob: Then they suffer from all these single-digit response rates and stuff like that, where they over-survey.
Rob: It’s all kinds of bad things.
Rob: The system, the foundational principle, the goal is to improve relationships with customers.
Rob: Foundational principle number two is, when you’re doing that, you want to learn as fast as you can, both at the individual performer level, so context interrupts, salespeople, service people, web designers, manufacturing, supply chain.
Rob: You want them to be learning how to serve customers better each and every day.
Rob: And then the third principle is, that everything you do in service of improving relationships and in service of learning to do it better, needs to grow the total value of your customer base.
Rob: And again, when you get too focused on the score, we’ve seen companies where, at least in functional groups or in small, they make uneconomic decisions so they can pump up their net promoter score and make some sort of incentive based goal for the management team or for the frontline.
Rob: When in fact, buying a higher score is a stupid decision.
Paula: Yes.
Paula: And that’s super clear, Rob.
Paula: My goodness.
Paula: I mean, my next question was literally, what are the risks of net promoter score and buying a good one, I think we can safely say, is a flawed mindset.
Rob: That is absolutely.
Rob: I mean, most of the problems with net promoter come from the fact that people misapply it.
Rob: And in misapplying it, they either are trying to pump up a score so they can look good or make a goal, or they’re sloppy because it’s hard, right?
Rob: So they, for example, they load lots of extra questions into the survey and ask customers the questions, the answers to which they should already know, which the customers know and get ticked off about, or they frame it in their terms, or they over survey, or they put their employees in the embarrassing position of begging customers for higher scores.
Rob: You know, those things happen all the time.
Rob: They’re going to happen with anything, right?
Paula: Yeah, human beings.
Paula: Yeah, unfortunately, yeah.
Rob: Almost all the problems stem from a misunderstanding of the objective.
Rob: The objective is not to have a higher score.
Rob: The objective is to grow the value of your customer base by earning the loyalty of your customers.
Rob: And the score and the feedback system around it are meant to help you learn faster.
Paula: Well, we’ll definitely get into that topic now, Rob, because I know you’re doing some fabulous work in that space.
Paula: But just before we do, the one thing I picked up actually, and again, it was one of your articles, is almost the cardinal sin to me of net promoter scores is if it’s not used.
Paula: So it’s one thing, you know, there’s, as we said, lots of ways of doing it badly.
Paula: But to me, it’s actually worse to capture the information, to ask for the feedback and then ignore it.
Paula: So that really struck me as a consumer, as something that I see all of the time.
Rob: Well, it violates the very first principle that we talked about, right?
Rob: If I ask you for feedback, Paula, how am I doing?
Rob: You say, well, boy, Rob, I really wish you would do this a little bit differently.
Paula: Yeah.
Rob: And then all I ever do is say, thank you for your feedback.
Rob: It’s very important to me.
Rob: And then never actually act on it.
Rob: You’re going to get ticked off eventually.
Rob: You’re going to say, that was a waste of my time to even tell them.
Paula: Yeah.
Paula: And totally disrespectful, which again, the whole point of the Net Promoter score is it’s a single question, respectful of customer’s time, and then you’re doing it at a service.
Paula: So, super interesting.
Paula: So, I’d love to then move on, Rob, to all of the current topics around using any metrics, and particularly these metrics, to grow the overall value of your customer base.
Paula: So, something that I know you’ve done lots of work, and again, lots of articles about.
Paula: And particularly, I suppose, what I’m finding fascinating is that you’re starting to push, I think, really hard, and again, Pete talked about this, to increase the visibility of the information, particularly that external parties are getting about customer loyalty.
Paula: So, I’d love you to explain the origins of these ideas, and maybe some of the concerns and frustrations you’re seeing, and what you’re hoping to achieve with this new way of thinking.
Rob: Well, like almost everything I’ve ever done in my career, this one was born out of frustration as well.
Rob: You know, we did great work for our clients for the entirety of my career.
Rob: I’m very proud of the work that we’ve done.
Rob: On the other hand, a significant number of times, not the majority, but too often to feel proud of, companies ended up backsliding.
Rob: There’d be a change in leadership, time would pass, and the work that we had done would get undone by subsequent leaders in the service of trying to meet quarterly earnings objectives or meet departmental functional budgets or meet goals for growth of a particular product’s revenues.
Rob: And when I was, you know, again, it’s like smart people don’t do stupid things if there’s not a reasonably good explanation for it.
Rob: And I need to understand what that is.
Rob: And the more I traced it back, it was like, okay, so the problem, first I was like, well, the problem is the incentives and goals of these managers.
Rob: And then I thought, no, the problem is the siloed, separated functional groups and how they don’t talk to each other.
Rob: And then I thought, actually, maybe the problem starts way earlier than all of that.
Rob: The problem is, and I believe an important source, like root cause of the problem is, that investors put pressure on companies to deliver against the metrics that the investors have access to.
Rob: Very rational, not, investors aren’t bad people.
Rob: They want to make money, and they have every right to.
Rob: And if we only give them information about current period performance, and we don’t give them what they need to evaluate the health of the customer base, to evaluate the value in the future of that customer base, then we get what is naturally going to come back from that, which is a focus on the things they can see today’s performance.
Rob: And so that’s what led me to the collaboration with Pete Fader and Dan McCarthy.
Rob: They had developed a very, very simple model that would allow you to take four or five inputs in addition to the normal stuff that companies report in their accounting statements.
Rob: And from those, project out the future trajectory of a company’s customer base with much, much more precision and accuracy than you could do just extrapolating from the traditionally reported P&Ls.
Rob: And so the insight that I had was that if we could just provide investors with those four pieces of information on a consistent basis, then we could both improve the quality of valuation by investors and the clarity with which management teams could talk to their investors about their progress in growing a customer base, make more rational trade-offs between this period’s performance and the future.
Rob: So yeah, we decided not to impose a bunch of arbitrary fees on our customers to make this quarter’s revenue numbers.
Rob: We decided that, or in some cases, you’ll see, like in the telecom industry, this is one of the ways that they improve their overall net promoter scores and improve the value of their customers.
Rob: We stopped holding customers hostage to these long-term plans.
Rob: We stopped doing as much, we simplified our billing and we took away a bunch of the fees.
Rob: Those things in the short term had a negative impact on revenue growth and profits, but in the long term, reduced churn and improved the value of the relationships and brought the value of the customer base up by far more than the lost revenue from those fees.
Rob: So that’s really the derivation of my current focus, which is saying we have to tie the actions we take to earn customer loyalty, whether it’s a rewards program, improved service, improved products, better pricing.
Rob: We have to tie those to the long-term economics of the business and to the share price.
Rob: And we have to give that visibility all the way from customer through to investor so that everybody can be pulling in the same direction and you don’t end up with these uneconomic trade-offs that get made in service of short-term goals.
Paula: I love it.
Paula: And I think it’s inspired thinking.
Paula: Are the investors on this journey with you?
Paula: Would you say?
Paula: I don’t deal with the investor community, but given that the pressure seems to be coming for short-term earnings, how is the education process going?
Paula: Are investors realizing actually that they need to be more patient over time and allow the companies they’re investing in to take this time to do the right thing?
Rob: You know, there are three or four different types of investors to think about here.
Rob: Okay.
Rob: You know, because like customers, investors are not monolithic.
Rob: They’re segments.
Rob: You’ve got consumer investors who are kind of like me, which are set-it-and-forget-it investors.
Rob: I’m index funds, and I put it in, and I hope that in 20 years it’s going to be great.
Rob: Those are not the investors we’re talking about.
Rob: You’ve got the other extreme, day traders, who are just looking to get an edge, and I say day traders, it could also be programmatic traders.
Rob: They’re looking to get an edge day to day.
Rob: Then you’ve got what people might call various forms of value investors.
Rob: Instead of thinking about the total value of the company, what they’re really doing is they’re trying to price the security relative to the market, and they’re looking at it saying, I think that this price of this share is going to go up or down in the next couple of days, weeks, months.
Rob: And so I’m going to make a bet one direction or the other.
Rob: And then finally, you’ve got, there’s other types too, but you’ve got, I’ll call them vulture investors or activist investors.
Rob: People who see an opportunity to force a management team to do something different than they’re doing so that they can pump up the value and exit with a big game.
Rob: So it’s those last two, the value investors and the vulture investors whose influence I’m trying to reduce a bit or change.
Rob: I want the value investors to be able to look at a company’s longer term value and make bets that are over a longer time horizon.
Rob: And I want the vulture investors or the, I should say, activist investors to see the opportunity not just to pull cash out of the business or not just to pump up the price in the near term, but to recognize opportunities where a company is undervalued relative to the value of its customer relationships, whereas mistreating customers and force management to change the way that they treat customers and thereby improve the value.
Rob: So those are the people that Pete and Dan and I have been talking to.
Rob: And we’ve been actually spending time with people who are kind of at every part of that spectrum.
Rob: People are like, look, I don’t care.
Rob: People who are, I have my own proprietary ways of getting insight into the value of a company’s customer base.
Rob: And I can go far beyond what a company would feel comfortable reporting because I have transaction data from a payments company that I can get to or blah, blah, blah.
Rob: But then you’ve got a large group of people who are like, yeah, you know what?
Rob: I want to see this on a regular basis across all the companies that I invest in because I want to be able to price these things for the long term.
Rob: And today I can’t.
Rob: And so it’s not one answer, but there’s a significant number of investors who really do want more consistent disclosure of customer metrics that would enable them to better value companies and thereby put more pressure on management teams to manage for long term customer value as opposed to just short term revenue and profits.
Paula: Wonderful.
Paula: And I guess for the listeners of this show, Rob, as you know, loyalty managers, loyalty directors, the people listening to this conversation very much have access to that information.
Paula: And, you know, again, are all very well intentioned people who are looking to grow the value of their firms.
Paula: So it sounds like, you know, if the pressure is coming from the investment community to the management teams, then, you know, the leadership, the loyalty leadership will increasingly need to be clear, transparent, and I think very, very excited and proud of the metrics that they’re reporting, you know, so that it is something that’s worthy of public, you know, appearances.
Rob: I would like people who are in the community that you spent most of your time with.
Rob: And these are people, by the way, that I, you know, especially early in my career, like that was a big focus of my efforts.
Rob: I think this is the team of people who have the information at their disposal.
Rob: And should be educating their leadership.
Paula: Yeah.
Rob: On the fact that if more people in the organization understood lifetime value, understood the differential value of some customers versus others, if we had the ability to talk as a leadership team across the entire organization about how different actions impact the value of those customers, not just how they impact the costs in your budget or the revenue on your product.
Rob: If we had that ability to speak with one language and one common set of metrics, we would be able to make better decisions, and we could educate our investors about where the value in our customer business, our customer space lies.
Rob: There’s no better group of people to advocate for the things that I am fighting for than the people who listen to your podcast.
Paula: Absolutely.
Paula: And as you were saying that, what I was thinking as well, Rob, is as well as being the community of people that can provide the information to the leadership team, what I’m hoping is that they become the leadership teams.
Paula: So in 10 years time, again, if this common language of loyalty directors being able to say to managers, this is how we need to run the business, that they get into those leadership positions because they have that same mindset that you talked about at the beginning of the show.
Rob: Well, I think it’s, yes, because they have the mindset and because most of the folks who are in these roles also have the analytic capabilities, the analytic mindset that enables them to tie the theory to specific actions with subpopulations of the customer base and with individual customers.
Rob: And I think that the technology has improved so much in the 30 years that I’ve been in business.
Rob: It’s possible today to do things we only dreamed about 30 years ago.
Rob: You can actually develop analytic models that allow you to decide what the next best action is for a particular customer.
Rob: You can measure the impact of actions you take on the trajectory of customer spending, on attrition, on credit performance.
Rob: And the people who are doing that are the people that are listening to your podcast.
Rob: I mean, these are the people who have the skill set and the orientation to do that.
Rob: I think that five years from now, 10 years from now, 20 years from now, those are the skills that will be required to lead large, complex organizations.
Paula: Wonderful.
Paula: Wonderful.
Paula: And I love again, I know that you are also putting pressure on the regulatory bodies to actually encourage them to again, drive transparency in the interests of everyone.
Paula: So I love to hear that that’s happening because again, I think we all get so busy in our day to day jobs, again, just driving the customer lifetime value that we forget there are other drivers that can really benefit and again, make sure that this all gets seen where it needs to be seen.
Rob: We need regulatory change, meaning the Financial Accounting Standards Board, the International Accounting Standards Board, the AICPA, the Securities and Exchange Commission in the US, there are others around the world.
Rob: We need those bodies to put pressure on leadership teams and to set standards for disclosure so that when somebody says, when a company says, I had this many customers on my books at the end of the quarter, you have clarity about what that means.
Rob: How do you define customers?
Rob: How many churned?
Rob: How many came in?
Rob: What was the revenue per customer?
Rob: Those need to be defined and disclosed in ways that investors can make sense of them.
Rob: And without the changes to accounting standards and disclosure standards, investors will be left to just do what they’re doing today.
Rob: So I’m very actively engaged with the accounting standards.
Rob: But we should know, I mean, all of us should know, those changes might not happen during my business career.
Rob: They happen so slowly that it may be my children who benefit from those more than me.
Rob: And it’s an investment I’m willing to make because I believe it so much, but I’m not holding my breath waiting for accounting standards to change, even though I’m fighting every day for it.
Paula: Yeah.
Paula: But I guess what I’m hearing, Rob, and again for listeners, what I want for them is it doesn’t matter actually whether the accounting standards change in the next 10 years.
Paula: We need to understand how best we can communicate with management in a language that helps them realize the importance of that long-term perspective.
Paula: So it’s back to your principles about we’re here to earn the customer’s trust at the end of the day.
Paula: So whatever we call it, whether we have to disclose it, we need to have that overall intention and loyalty people fundamentally.
Paula: That’s the ethos of how we live day to day.
Paula: And I want to give the people listening to the show the confidence to go to the management team and say, did you realize the lifetime value of our customers, that they might not always be having those conversations?
Rob: I think they need to have those conversations.
Rob: And they need to translate lifetime value back into P&Ls.
Rob: We need the translator key because if all you’re doing is you’re talking about lifetime value and the rest of the management team is talking about next month’s revenues, next month’s cost, blah, blah, blah, you sound like you’re speaking Greek.
Rob: So you need to be able to say both.
Rob: This will impact next month, next quarter, next year in the following way.
Rob: It will also create this much lifetime value.
Rob: And here’s why.
Rob: And here’s why you should care about that.
Paula: Wonderful.
Paula: Well, on that note, I suppose my final question is how would you recommend that people educate themselves about this whole area?
Paula: As I said, you write a huge amount for Harvard Business Review.
Paula: Fortune Magazine did a recent article, so we’ll link to all of your current work.
Paula: But you also mentioned a forum as well.
Paula: Rob, I don’t know if there are articles or newsletters that you recommend that the loyalty industry can access from Bain to keep up to speed with this.
Rob: Yeah, there are a couple of ways to do it.
Rob: First, if you go to netpromotersystem.com, you’ll find the assembly of all of the stuff we do.
Rob: The Net Promoter System podcast, what we call Loyalty Insight Series, which is a long series of articles that describe different aspects of Net Promoter System.
Rob: You’ll find also links back to bain.com, where we also have a wealth of resources that are slightly overlapping, but actually a bunch of unique stuff related to customer loyalty, customer experience, product design and development, brand, so the full suite of stuff that goes far beyond just the application of Net Promoter.
Rob: And then I think it would be worthwhile.
Rob: I know it’s probably, for some people, it’s a little dry, but I would read the Harvard Business Review series of articles, there are three articles in what’s called the Spotlight series from January, February.
Rob: The article that I wrote about customer value, the article that Pete Fader and Dan McCarthy wrote about valuing companies based on customer value.
Rob: And then an article that is an interview of Jack Brennan, who is the former CEO of the Vanguard Group, the investment management fund company, that is a loyalty leader in itself.
Rob: And Jack is the former lead director of General Electric.
Rob: He’s former lead director for the parent of the accounting, Financial Accounting Standards Board, it’s called the Financial Accounting Foundation.
Rob: He is a very, very thoughtful guy, and he describes why he thinks investors should pay attention to this.
Rob: If you do that, you’ll actually at least be armed with the language to talk to your leadership team about this topic.
Rob: And I think it will, you’ll secure more resources for the loyalty program, if you get them to understand the linkage to the current and future value of the company.
Paula: Wonderful.
Paula: Well, I don’t think there’s any better way to wrap up the show, Rob.
Paula: I have to say I love the work that you’re doing.
Paula: I love the fact you’ve been podcasting about Net Promoter Systems since 2014.
Paula: So I really want to recommend that to all of my listeners.
Paula: Is there anything else you wanted to mention before we go?
Rob: Paula, this was a very thoughtful interview.
Rob: I appreciate you asking such thoughtful questions and being such a well-informed interviewer.
Paula: Wonderful.
Paula: Well, thanks a million.
Paula: So Rob Markey from Bain & Co.
Paula: Thank you so much from Let’s Talk Loyalty.
Paula: This show is sponsored by The Wise Marketeer, the world’s most popular source of loyalty marketing news, insights and research.
Paula: The Wise Marketeer also offers loyalty marketing training both online and in workshops around the world through its Loyalty Academy, which has already certified over 150 executives in 18 countries as certified loyalty marketing professionals.
Paula: For more information, check out www.thewisemarketeer.com and www.loyaltyacademy.org.
Paula: Thanks so much for listening to this episode of Let’s Talk Loyalty.
Paula: If you’d like me to send you the latest show each week, simply sign up for the show newsletter on letstalkloyalty.com and I’ll send you the latest episode to your inbox every Thursday.
Paula: Or just head to your favorite podcast platform.
Paula: Find Let’s Talk Loyalty and subscribe.
Paula: Of course, I’d love your feedback and reviews.
Paula: Thanks again for supporting the show.
Publisher’s Note:
This transcript was generated with the help of AI and podcast publishing tools such as Apple Podcast’s transcription service.
In the interests of efficiency and minimising our costs as a small business, it has not been checked by a human.
If you have any comments or concerns about the accuracy of this content, please do contact us for changes or corrections.
