Wednesday, April 12, 2006

The Ultimate Question - Customer Relationships and Investing?

A recent book review by Harvey Schachter of The Ultimate Question: Driving Good Profits and True Growth was very interesting.

According to research done by author Fred Reichheld, the vast number of questions asked in relation to customer service aren't all that useful in helping a company to devise metrics that assist in developing profitability.

According to Mr. Reichheld, the only question that's required is this:
How likely is it that you would recommend this company to a friend or colleague?
Respondents are then asked to score this "ultimate question" on a scale of 1 to 10, with ten being the best score.

People rating the company at a nine or ten are considered "promoters" of the company, those at 7 or 8 are considered passive and those below are considered detractors.

The detractors, says Mr. Reichheld,
... may appear profitable, but their criticisms and attitude diminish a company's reputation, discourage new customers, and demotivate employees. They suck the life out of a firm.
The net ratings are developed by subtracting the percentage of detractors who are customers from the percentage of customers who are promoters.

So if a company had 65% promoters as customers, and 30% as detractors, it's net scores would be 35. The highest ranking firms were USAA (a non-public insurance company, catering mostly to military personnel) at 82, Harley Davidson at 81, Costco Wholesale at 79, at 73, eBay at 71, and Apple Computer at 66.

Interestingly, I looked at the stock charts of all the public companies mentioned therein, looking at their ten year records. While Amazon and eBay had only traded for 8 1/2 and 7 1/2 years respectively, one thing seems very clear. This measure is an unbelievable proxy for stock market performance too. The minimum any of these stocks had increased over that period was by a factor of five and went as high as 24x.

The S&P 500 had only doubled over that same period.

The ultimate question: The only one needed for investing too?


The Confused Capitalist

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