November 27, 2011
Reichheld, Fred (2006). The Microeconomics of Customer Relationships. MIT Sloan Management Review. Vol. 47, No. 2
The purpose of this article author, Fred Reichheld discusses the microeconomics of customer relationships. How customer relationships affect a company's growth rate and the financial performance. Various companies like, General Electric Company uses "net-promoter score" as a metric tool to determine the customer relationships in its company. The NPS system is based on one key question, "How likely is it that you would recommend us to a friend or colleague?" and then divided into three main cluster groups: promoters, passives, and detractors. Each of these cluster groups help to determine the impact of customer relationships. Promoters have the highest repurchase accounting for more than 80% of referrals for new customers. Passives the second cluster group accounting for more than 50% of referrals for new customers and detractors account for 80% negative referrals for new customers.
The article discusses the value of a promoter or a detractor and learning how to understand the values numerically of why and how customer relationships impact a company's financial performance. The article provides two diagrams one to briefly demonstrate the value of promoters and detractors and illustrates how a company can identify with customers who can help benefit the company as well as those who can harm the company. The factors of NPS such as word of mouth, cost to serve and annual spend, margins, retention, and average customers are key proponents of the metric tool that is used to motivate a company to become more focused on improving its products and services for customers. The second diagram, the customer grid demonstrates NPS and customer profitability for a company. The customer grid is designed to help show companies how to be strategic in analyzing each segment with...