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By Duane Craig
September 12, 2016
Business revenues coming from returning customers are very important to construction businesses. Not only is business from returning customers less expensive to acquire, but when it comes from the “right” returning customers, it is a growth engine. Many construction businesses don’t know who their “right” customers are, and so they spend far too much on winning new business. Finding your “right” customers starts with understanding the 80/20 rule, and then implementing a system known as the Net Promoter Score.
When SumAll analyzed millions of customer transactions logged by businesses using its service, it found that stable companies got 25% to 40% of their revenue from returning customers. And, companies with a “40% level of repeat customers had 47% more revenue than businesses with only a 10% level of repeat customers.” Then there’s the famous 80/20 rule.
The 80/20, or Pareto rule, originally applied to an observation about wealth and land ownership. Economist Wilfredo Pareto showed that 80% of Italy’s land was owned by 20% of the population. He also observed that 80% of the peas from his garden came from 20% of the pea pods. Over the years, the 80/20 rule was applied to many things, including to the ratio of sales to clients. Essentially, 80% of your sales come from 20% of your clients. And, the rule has stood the test of time across many different types of comparisons.
When you consider that it costs a lot more to sell to a new customer than to an existing one, it makes sense to spend more effort where you get the greatest return. Besides taking steps to use the 80/20 rule to your benefit, you can also use the Net Promoter Score as a leading indicator of business growth. It is a process, more than an indicator, and when you use it, you can find who your best customers are, and then discover how to really engage them. The higher your NPS, the more likely you will outperform in your market, and consistently differentiate your business from the sea of competitors. Here is the story behind the NPS, and how to figure and use yours.
The NPS grew out of research done at Bain & Company to see what might work better than customer satisfaction surveys. The research team used data supplied by Satmetrix and tracked how people’s responses to various questions matched their behavior. What they found was the answer to the question below was most effective in predicting the actions of respondents. It is generally called, “the ultimate question.”
What is the likelihood that you would recommend Company X to a friend or colleague?
When people chose high scores for this question, their responses correlated strongly with repurchases, referrals, and other actions that help companies grow. And, grow they do. Companies that are Net Promoter leaders grow at about twice the rate of their competitors. Construction happens to be one of the industries where the Net Promoter Score is a strong predictor of growth for a company. That’s because:
There are plenty of players providing customers with a wide range of choices
Customers can easily switch providers
The industry is mature
You should note that just having a high Net Promoter Score doesn’t guarantee success if other business practices are not solid. If you make bad decisions about risk, or you ignore innovation, you’ll miss the opportunities that lie in high quality relationships with your current customers. Since Bain came out with the Net Promoter Score there are companies and people who have created their own advisory and consulting businesses around it. So, there are plenty of places to find approaches to using the Net Promoter Score that will fit your business. For most, the following should help you get started at reaping the advantages of the NPS.
You calculate the NPS after surveying your customers using the ultimate question. When they answer the question they do so on a scale from 0 to 10, with zero being the lowest likelihood they would recommend your company to a friend or colleague.
Next you put the respondents into three groups:
9 & 10 are Promoters and they are your most loyal and enthusiastic customers. They will increase purchases over time and will account for more than 80% of your referrals.
7 & 8 are the Passives and they are satisfied for now, but will deliver referral rates up to 50% lower than your promoters. They will also defect to your competitors very easily.
0 through 6 are the Detractors and they represent your unhappy customers. They will deliver more than 80% of your negative word-of-mouth, will leave you easily, and although they might be quite profitable to you, they damage your reputation continually, discourage new business from coming your way, and demotivate employees.
Figure out the percentage of respondents to the question who are promoters and the percentage of detractors. Suppose you have 10 customers and when you ask them the ultimate question, four choose a 9 or a 10 on the scale. You have 40% promoters. Now, also suppose that two of your customers choose a score between 0 and 6. You have 20% detractors. Next, subtract the percentage of detractors (20%) from the percentage of promoters (40%) giving you a Net Promoter Score of 20. The higher your score, the greater your chances for growth.
You will find it a challenge to compare your score to a benchmark for the construction industry without buying into one of the services that tracks those benchmarks. But according to B2B International, a score between 20 and 25 is average for companies selling to companies. If a lot of your business is service, then a NPS of 30+ is typical. But even without comparing your score to a benchmark, you can benefit from tracking your NPS over time to see how you are performing in customer satisfaction.
You can track your NPS on a regular basis and also do so by business type, geography, and other characteristics. To get a deeper assessment, some companies also ask customers open-ended questions to get them to explain their ratings. This closed loop helps companies learn more about how they can improve their businesses over the long term.
The goal in using the NPS is to develop promoters and reduce detractors. When reducing detractors, the goal is to convert them to promoters, rather than simply canceling with business altogether.
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