The Ultimate Question – Fred Reichheld 2006

“True growth – growth that occurs because their customer love doing business with them. (…) This is the only kind of growth that can be sustained over the long term.” (Reichheld, 2006, p.ix). “The foundation for good business is the ability to organize relationships into voluntary associations that are mutually beneficial and accountable for contributing productively to the surrounding community.” (Reichheld, 2006, p.176).

“Companies can increase their share for a while by buying growth, through advertising, discounting, new market programs, mergers, acquisitions, and many other means.” (Reichheld, 2006, p.177).

Bad profits: “They’re profits earned at the expense of customer relationship. Whenever a customer feels misled, mistreated, ignored, or coerced, then profits from that customer are bad. Bad profits come from unfair or misleading pricing. Bad profits arise when companies save money by delivering a lousy customer experience. Bad profits are about extracting value from customers, not creating value.” (Reichheld, 2006, p.4).

“Bad profits work much of their damage through the detractors they produce. Detractors are customers who feel badly treated by a company – so badly that they cut back on their purchases, switch to the competition if they can, and warn others to stay away from the company they feel has done them wrong. Detractors don’t show up on any organization’s balance sheet, but they cost a company far more than most of the liabilities that traditional accounting methods so carefully tally.” (Reichheld, 2006, p.6).

“The pursuit of bad profits alientates customers and demoralizes employees.” (Reichheld, 2006, p.3).

“Granted companies can always buy growth. They can encourage the hard sell and pay fat commissions to the salespeople who master it. They can discount heavily, offering temporary rebates, sales, or ‘free’ financing.” (Reichheld, 2006, p.8). “Buying growth is expensive. IT tends to create a profit squeeze, which in turn deepens a company’s addiction to bad profits.” (Reichheld, 2006, p.9).

 “A company earns good profits when it so delights its customers that they willingly come back for more.” (Reichheld, 2006, p.9). It saves cost in advertising and marketing (Reichheld, 2006, p.11). It turns existing customers into the marketing department by creating referrals (Reichheld, 2006, p.12).

The best companies “take seriously the principle pf the Golden Rule: treat others as you would want to be treated.” (Reichheld, 2006, p.x).

How to measure good profits. How to make people accountable for building good relationships with customers? “By asking that question systematically and by linking results to employee rewards, xyou can tell the difference between good profits and bad.” (Reichheld, 2006, p.18). “take the percentage of customers who are promoters (P) and subtract the percentage who are detractors (D).” (Reichheld, 2006, p.19).

“But the business goal here isn’t merely to delight customers; it’s to turn them into promoters – customers who buy more and who actively refer friends and colleagues. That’s the behaviour that contributes to growth.” (Reichheld, 2006, p.31).

“increase the percentage of promoters and decrease the percentage of detractors. These are two distinct processes that are best managed separately.” (Reichheld, 2006, p.32). “investing to delight customers other than those in the core rarely makes economic sense.” (Reichheld, 2006, p.32).

“Priority 1: Invest in your core. Sector C. “They love doing business with you. (…) remember how much additional benefit promoters bring you through referrals and positive word of mouth. These are the customers that should drive your strategic priorities.” (Reichheld, 2006, p.123). “ you might compare the percentage of capital allocated to customers or segments in sector C with the percentages targeted to customers in other sectors.” (Reichheld, 2006, p.126). “it is easier to crank up prices for loyal promoters than for other customers, divisions stretching to reach their profits goals may be tempted to take advantage of this lever.” (Reichheld, 2006, p.126). “monitor margins on core customers carefully. If margins drift upwards, either cut prices or use the margins to provide even more value to these customers.” (Reichheld, 2006, p.126).

Priority 2: Reduce bad profits: sector A “Customers in this upper-left sector don’t like doing business with you and are spreading negative word of mouth. They may defect at the first opportunity. Yet because they are profitable, you can afford to invest in solving their problems.” (Reichheld, 2006, p.127).

Priority 3: Find additional Promoters

 “Perhaps the most revolutionary idea in this book is the proposition that it is at least as important to measure the quality of relationships as it is to measure profitability.” (Reichheld, 2006, p.189)