We shared the Dell case study showing the apparent association between customer recommendation and stock price with Peter Hutton of Brand Energy Research writes:

Thanks for sending me this.

Yes, I am familiar with Reichheld’s NPI. Curiously enough, I developed my own advocacy scale, with a net advocacy score, 12 years ago, before Reichheld came to prominence with the book ‘The Loyalty Effect’ published in 1996, I believe.

The NPI has been much criticised not least recently by a chap called Tim Keiningham who looked at Reichheld’s own data and found that the conclusions he asserted in his book just did not follow from the data and analysis that he had used!

This did not surprise me too much since, when I was at MORI, I tried unsuccessfully to find positive correlations between net advocacy and growth (of profit, sales or whatever) and concluded it was for two main reasons:

1. It is rare, and generally impossible, to find survey data and financial data that also have exactly common fields and in sufficient quantity– e.g. time period and business unit – to run robust correlation analyses. Customer satisfaction surveys are often conducted in discrete time periods that do not correspond to the business accounting periods. Moreover, they are normally undertaken for business sub units or products/services whose financial performance is not necessarily separable from other areas of activity in the business’s accounts and/or where spending in one period is not necessarily designed to have an impact until some time later (e.g. R&D, recruitment, marketing etc).

2. What drives value creation in a business is very complex. In the long term, of course, more loyal customers will enable you to grow faster; but so too will a lot of other things – properly structured financing, favourable market conditions, weak competition, well motivated staff with the right skills, clear business strategy, effective advertising/marketing, sound leadership and management and so on. All are necessary but none are sufficient on their own to achieve outstanding performance. In that light it is no surprise that one factor – customer loyalty as reflected in the NPI – has no correlation with growth.

However, that does not detract from the value of the idea underlying the NPI. In my experience knowing that you have x% advocates and y% detractors is very important and should be a key focus for top management. But the most valuable questions, as you imply in your piece, are those that reveal what is driving your scores up or down. They are the only ones you can actually act on and are therefore arguably the Ultimate Questions.

This is what I wrote to him in response:

Thank you for this very thoughtful response. We have a lively debate on the NPI with Justin Kirby of “Connected Marketing” fame. He makes the same point as Tim Keiningham, broadly.

Fred Reichheld may have over-stated the case when he entitled that book “The ONE number you need to grow”! Clearly you need to have other things in place to execute. A company can promote warm feelings but it takes marketing professionalism to turn that into a world-beating brand.

My hunch is that online monitoring solves some (but not all) of the sample bias issues associated with using NPI off-line and that it adds an interesting additional value which is that it provides an index of

A) voluntary, spontaneous endorsement or criticism
B) explanations for that endorsement

which goes very much to the heart of what businesses are looking for when they want to create word of mouth marketing campaigns.

How do you measure word of mouth? The increasing importance of social networks to brands and advertisers has raised this problem very sharply in the last few weeks. Media owners, pharmaceutical companies, automotive manufacturers all need to know the same thing: how am I doing?

If a brand can establish how it is doing in “word of mouth” in relation to other brands this information can drive decisions about the allocation its marketing or campaign spend.

We would need to agree what a ranking in the word of mouth market means.

In the Market Sentinel methodology there are three possible ways of ranking in word of mouth:

• Buzz (numbers of citations)
  
• Approval (sentiment compared to benchmarked competition)
  
• Authority
  

“Buzz” is chat, pure and simple. Measuring it gives you an indication as to whether something is worth mentioning. Britney Spears has buzz. It ebbs and flows. The weakness of buzz as a measure is that you can be talked about without your product necessarily being purchased, or your value endorsed. Key to consumer brands is the central flaw that not all brands have talk-about-ability. Some products and brands are worthwhile, and do their job well (like car insurance) but they are just kind of boring. That doesn’t mean that they are bad products, or that they aren’t relied on, but it means that using “buzz” to track them is bound to fail.

Approval is better, as it equates to the likelihood of customers to recommend your products. We measure it using the “Net Promoters’ Index” - that is a simple index of how many people promote and how many detract from a product or brand in relation to industry benchmarks.

Authority is best of all, it equates to trust, which means that your marketing messages are more likely to be believed, and it corresponds approximately to Google ranking, since it relies on authorities citing you and linking to you. We measure this using a “Stakeholder Analysis” - an index of all the stakeholders in a topic as to who they view as authoritative.

Here is how we would address the problem of benchmarking a brand in relation to word of mouth:

• Identify the topic in which the brand seeks greater authority
  
• Benchmark its existing authority (conduct a stakeholder analysis)
  
• Identify the key authorities to whom the brand would need to communicate its broader proposition
  
• Profile those authorities in terms of their ego-net (who they link to and by whom they themselves are cited), and in terms of the statistically improbable words they use (i.e. their idiolect or individual language)
  
• Assess the brand’s own “Clarity” (consistency of message on the topic) and “Resonance” (the extent to which the brand’s language is picked up - or ignored - by stakeholders). I will return to these concepts later and examine them in more detail
  
• Then we work with the brand’s communications people to produce high value content designed to appeal to those authorities. This communication material could often be contained in a blog, but could form the kernel of a buzz marketing campaign, or a strategy for offline communications.
  

An article in the New York Times (requires free registration or use Bugmenot for a one-time password) profiles how Wal-Mart have taken on their detractors with a pro-active PR campaign, run by a number of ex political campaigners.

The PR campaign emphasises the Wal-Mart positives (good value, local employment) and looks to off-set a campaign of detraction from pressure groups like Wal-Mart Watch, run in part by trade unions who oppose the company’s employment practices and who cannot get recognition from the company. (Note their website’s heavy use of email newsletters, syndicated news, its blog and comment pages) The trigger is a new documentary entitled “Wal-Mart: The High Cost of Low Price” by Robert Greenwald. The documentary looks systematically at Wal-Mart negatives - the effect on smaller local businesses of a Wal-Mart opening up, their healthcare policies and employment policies.

Key quotes:

A confidential 2004 report prepared by McKinsey & Company for Wal-Mart, and made public by Wal-Mart Watch, found that 2 percent to 8 percent of Wal-Mart consumers surveyed have ceased shopping at the chain because of “negative press they have heard.”

To keep up with its critics, Wal-Mart “has to run a campaign,” said Robert McAdam, a former political strategist at the Tobacco Institute who now oversees Wal-Mart’s corporate communications. “It’s simply nonsense for us to let some of these attacks go without a response.”

The impact of the negative sentiment in slowing Wal-Mart’s growth is a classical demonstration of Frederick Reichheld’s net promoters theory. This theory maintains that as the proportion of your detractors grow, your growth is curtailed and that a decline in your net promoters index (the number of your promoters minus your detractors) is strongly predictive of a stock price decline.

It would be interesting to track the impact of Wal-Mart campaign, which is run by Edelman on Wal-Mart’s online net promoters index.

Thanks to Flemming Madsen of Onalytica who suggested we blogged this.

New Communications Blogzine has published Mark Rogers’ article looking at how Market Sentinel measures corporate reputations with our “net promoters index”. Here it is:

A year ago when our new company Market Sentinel started distributing live reports on brands drawn from monitoring message boards and blogs, one of our early pitches was to a research head of a large mobile carrier who was sceptical as to the value of it.

“Who are these people?” he asked, reviewing a page of sometimes negative remarks on a new mobile handset. “Isn’t this just chit-chat?”

We realised then that we would need to produce a metric which showed – in as objective a way as possible – how positive and negative commentary played online. We lighted on the work of Bain and company’s Fred Reichheld. Reichheld, in a series of books like “The Loyalty Effect” (1996) and “Loyalty Rules” (2001) has demonstrated that there is a simple way of measuring the public attitude to a company. You simply ask a consumer:

“Would you recommend this product or service to a friend?”

If the answer is yes, the person is a “promoter,” if no, the person is a detractor. You deduct the first number from the second to reach something known as “the net promoters index.”

The index really comes into its own when you compare two or more companies in the same sector. The higher the positive number applied to a company, the more likely the company is to grow (more recommendations=more customers). The lower the number, the more likely the company is to shrink (more detractors=fewer repeat purchases).

Recommendations matter. In Emanuel Rosen’s book, the Anatomy of Buzz he points out that

• 65% of Palm customers heard about the device from another person.

• Friends and relatives are the number one source for information about places to visit or about flights, hotels or rental cars.

Of people surveyed by the Travel Industry Association:

• 43% cited friends and family as a source for information.

• 57% of customers of one car dealership in California learned about the dealership from another person

“This is not unusual,” says Jim Callahan of the research company Dohring.

[Source: James Torio’s “Blogging a Global Conversation” ]

The recommendations we would formerly seek from friends and family we increasingly find through Google. Research shows that 75% of shoppers use search engines with the intention of purchasing products and services . What they find when they get there is increasingly determined by bloggers and contributors to online forums. Recent research by Market Sentinel in the UK showed that, of Nielsen’s Top 50 grocery brands, 40% had negative commentary in the top ten results on Google UK . Searchers will even put keywords into searches to look for issues. For example, in the last 30 days, one of the popular searches tracked by UK-based paid search vendor has been “Ford Focus problems”. This is a search designed to flush out online resources dealing with customer service issues.

Why does this “net promoters” index matter? Why is it important to keep the number of detractors down, and the number of promoters high? According to Reichheld’s exhaustive studies, it is very accurate leading indicator of stock price. A high value means that your stock will rise, and a low value spells trouble.

I was reminded of this recently in the context of some work Market Sentinel and its partners are doing looking at the issues a famous corporation has been experiencing with its customer services function. The corporation, faced with a highly competitive marketplace, took the decision to offshore much of its customer services function to India. It cut down on expensive home visits which were an important constituent of its value add. Wall Street applauded and the stock price rose. However the number of negative comments about the company in message boards and blogs rose steeply. Customers did not appreciate the long waits for customer service. They did not appreciate the failure of the company to fulfil on its after sales promises.

Finally, earlier this summer, the company was targeted by a famous blogger who had bought one of its products and was frustrated not just by the poor quality of the product, but by the company’s failure to fulfil its customer service promise. The blogger started writing about it and was immediately deluged with comments and trackbacks by aggrieved fellow customers.

A couple of weeks back the company published its latest numbers. Growth has stalled (more detractors=fewer repeat purchases). The stock price fell like a stone. As Mr. Reichheld puts it in a paper published by the Harvard Business Review, the “net promoters” index is /”The One Number You Need to Grow”.

Market Sentinel’s benchmarking service provides an index of “net promoters online” and tracks it live. It is now our most popular service. Tracking corporate reputation online is the business equivalent of the Nielsen rating. And it is something managers and corporate investors simply have to do if they want to look at whether a company is on the way up, or the way down.

Dell used to have a reputation for quality, convenience and price, combined with peace of mind, thanks to their expensive, but reliable customer support. They made an emotional connection with the PC buyer.

Their recent woes are again highlighted by Business Week. This is more than a “PR” or even a “Customer Services” story. Dell have lost the emotional connection with their buyers due to their failure to deliver on their promises. Blogger Jeff Jarvis has been instrumental in bringing to wider notice a systematic and deep-seated malaise in Dell’s quality assurance and customer service. Plenty of people had issues before Jeff did, and continue to have them today. Read the comments at the bottom of the Business Week story for evidence. Jeff was simply responsible for bringing the issue in front of the mainstream media. Here at Market Sentinel we are quick to bang the drum for blog monitoring, web watching and encouraging companies to use the right tools to respond to PR issues, but in this case to reestablish the emotional connection they have lost Dell have to fix the problem of underdelivery first and then talk about it in the blogs and the forums.

It is significant to note that Dell’s stock price is down, due to stalled growth. The weight of negative commentary coming out of messageboards and blogs has yet again proved to be a reliable leading indicator of stock price. If you would like to benchmark your own company or someone else against its competitors contact us to hear about Market Sentinel’s “Net Promoters” index - based on the work of Frederick Reichheld - we can help you establish whose stock you should be buying, and whose you should be selling.