Frederick F. Reichheld

Good Ethics Is Good Business?

Spend any time with a business executive and you might hear the cliché, “Good ethics is good business.” Setting aside the clear disassociation between this statement and the way American businesses operate, the philosopher in me reacts negatively to such statements. Often times, good ethics does equal high profits, but such a statement should never paint broad strokes. Occasionally, the right decision costs a firm extensive money.

However, Fred Reichheld’s The Ultimate Question might offer a key to translating an overused cliché into a tangible metric that links profits with good ethics.

Rethinking Profits

At its core, The Ultimate Question proposes that business managers rethink the ways they evaluate business success. Since financial metrics are easy to produce and easy to read, managers often make decisions strictly based on financials.

Reichheld, however, believes that these profit-oriented measurements force business leaders to become addicted to bad profits. Reichheld says,

“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” (6).

To reorient business decisions, the author argues that managers ought to measure customer satisfaction instead of financial performance. If a company creates loyal customers, it produces good profits.

“A company earns good profits when it so delights its customers that they willingly come back for more – and not only that, they tell their friends and colleagues to do business with the company. Satisfied customers become, in effect, part of the company’s marketing department, not only increasing their own purchases but also providing enthusiastic referrals. They become promoters” (9-10).

The Ultimate Question

After years of research, Reichheld and his consulting firm, Bain & Company, found that highly satisfied customers offer a direct link to profitable long term growth for a company. In order to find out whether a company holds satisfied customers, only one question needs to be asked. That question is:

“How likely is it that you would recommend this company to a friend or colleague” (18-19)?

By answering that question on a 0-10 scale, a company can truly gauge the satisfaction and loyalty of its customers. Those that answer in the 9-10 range are considered promoters; those in the 7-8 range are passive; and those in the 0-6 range are detractors. Thus, a company will know the satisfaction of its customers by subtracting the detractors from the promoters. This equation gives managers a net promoter score (NPS).

If the company’s NPS is high, it has delighted customers who buy multiple products and encourage their friends to do the same. A company with a low NPS, on the other hand, is addicted to bad profits and is holding its customers hostage. Whenever the customers have an opportunity to leave this company, they will.

Theory aside, Reichheld’s metrics hold when applied in business settings. The industry leaders in NPS are also growing exponentially and making large profits.

TOMS: Good Ethics Equaling Good Business

Considering the angle I presented at the beginning of the review, where are the ethics in this book? At first glance, NPS is a customer satisfaction metric, an equation with little connection to ethics. A business need not be overtly ethical in order to serve customers; it only needs to practice the golden rule of treating others as it would wish to be treated in order to obtain a high NPS.

But I argue that serving customers is a task that orients a company toward ethics. By thinking of the needs of the customer, a company cannot act selfishly because a selfish action results in bad profits and customer detractors.

Furthermore, I hypothesize that a business which promotes its ethical practices as a core reason for operating have a high NPS. For example, TOMS shoes illustrates the significance of promoters. With its one-for-one social enterprise model, the company relies on customer promotion for its advertising. In fact, TOMS dedicates a portion of its website to customer testimonials. Without the social ethics surrounding the business, TOMS is just another shoe company. Knowing that a shoe purchase helps a child in need, customers take great joy in wearing and promoting the product. Thus, TOMS success relies on a high NPS for profitability.

So perhaps, advertised good ethics does equal business. More research is in order, but a link between ethics and high profits seems plausible.

With bad profits leaving most companies middling around a 0-10% NPS, the search for ways in which a company can raise its NPS, and therefore grow, is extremely important. If you manage a business, you owe it to yourself, your employees, and your customers to read The Ultimate Question.

Originally published at http://wherepenmeetspaper.blogspot.com… (meer)

I read this book because in my job, I deal with customer loyalty. How do we create loyal customers? What can we do to earn their loyalty? This book went into that and much more.

The book took a few case studies and showed how having loyal customers brought increased growth. The author then showed how this was possible by the numbers. It is pretty impressive. Clearly, more loyalty is better. But how do you achieve it?

The book talked about how to attract the right customers and how to keep them. It also discussed how having loyal employees and even investors will help the business. Fundamentally, it is a culture of loyalty that must be fostered within the business.… (meer)