A new study from Satmetrix examines the financial impact of positive and negative customer word of mouth.
The study, entitled 'Net Promoter Economics: The Impact of Word of Mouth', is the second in a series and highlights the business-to-consumer credit card industry.
Using Net Promoter, the study reveals how customers impact the bottom line through their buying and referral behaviours. Co-developed by Satmetrix and Fred Reichheld, author of the The Ultimate Question, Net Promoter enables companies to categorise customers into "Promoters" (those who are highly likely to recommend a company and/or its products) and "Detractors" (those who are unlikely to recommend a company and/or products). The result is a single metric that serves as an indicator of customer loyalty and long-term growth.
Building on Net Promoter, Satmetrix has developed the Net Promoter WOM Economic Framework, which determines total customer value based on buyer and referral economics. Buyer economics refers to how much a customer spends over a given period of time, while referral economics refers to the amount of new business that is gained or lost as a function of what the customer tells others about their experience.
Applying this framework to the credit card industry, Dr Vince Nowinski, Director of Methodology at Satmetrix, and his team discovered that each Promoter spent US$19,786 over the previous year, approximately US$2,500 more than the average customer spend of US$17,319. In contrast, Detractors spent an average of US$13,912, approximately US$3,400 less than the average customer.
In addition, Detractors can compound the loss of revenue through negative word of mouth. The study estimates that each Detractor will cost their credit card provider US$7,690 in lost revenues by virtue of the influence of their negative word of mouth.
According to Dr Laura Brooks, vice president of business consulting and methodology for Satmetrix, "It is clear that, in the long run, customers value and remain loyal to a company based on positive experiences rather than clever marketing campaigns. In turn, these loyal customers provide an efficient, low-cost acquisition engine through their own positive referrals. Adapting a stronger customer-centric focus pays clear dividends in terms of customer spend, tenure, and word of mouth."
The white paper has been made available for download from Satmetrix's web site - click here (free registration required).