Copmany example: Dell
Word-of mouth economics at Dell

To show how to calculate word-of-mouth, an essential component of NPS, a small Bain team quantified the value of promoters and detractors in the personal computer business. The team used only publicly available data so that what they did could serve as a model for companies that lack sophisticated databases. Indeed, the same approach can be used by prospective investors—even by competitors—to understand a firm's customer-relationship economics.

The Bain team focused on the industry leader, Dell, and calculated the value of detractors and promoters for Dellís consumer business. The results of this analysis are displayed in the figure below: while securities-analyst estimates indicate that the average consumer is worth $210 to Dell, in fact a detractor costs the company $57 while a promoter generates $328. The economics of word-of-mouth was the biggest source of difference between the average value of a customer (based on conventional accounting methods) and the true economic value of promoters and detractors.

Now, here's a step-by-step calculation of the value of this positive word-of-mouth.

  • In the survey, 25% of new customers said the primary reason they chose Dell was referral. So, 1 million of Dell's 4 million new customers in 2004 came from positive word-of-mouth.
  • Since each new customer is worth an average of $210 each, those 1 million new customers were worth $210 million to the company.
  • If 40 million positive comments generated $210 million in value, each positive comment was worth $5.25.
  • Given that the average promoter reported making positive comments to about 8 people a year, the promoter's positive word-of-mouth is worth $42 (8 ◊ $5.25).
The survey also asked customers about their average annual spending, their tenure, and the number of times they called Dell's customer support, all of which enabled the team to estimate the other economic advantages shown in the figure above. Overall, they found that promoters were worth $118 more than an average customer, or $328. If this analysis were done with Dell's internal data, the number would probably be higher, since it would be possible to quantify the superior value of referred customers over time. It would also be possible to track more accurately the repeat-purchase behaviors of promoters.

The Bain team's approach reveals the powerful economics of customer promoters. In 2003, Dell had about 8 million consumer customers. The 15% who were detractors cost the company about $68 million (1.2 million detractors at $57 loss per detractor). Converting just half of those detractors into average customers—not an unrealistic target, given that other companies with high Net Promoter Scores typically generate only 3 - 8% detractors—would add more than $160 million annually to the bottom line (600,000 detractors at $267 improvement per conversion). This simple math could help Dell managers place the right level of priority on reducing detractors and increasing promoters.

In short, by moving beyond traditional customer satisfaction surveys and rigorously tracking NPS, businesses can finally create a link between customer feedback and cash flow. Companies can begin to squeeze bad profits out of their income statement and tune up their growth engine for consistently superior performance.

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