Iceberg Dead Ahead
How word of mouth influences customer decisions
By Peter Lee
Companies typically report on lost (or churned) customers, using this number as the definitive scorecard for how their business is performing from the Customers perspective, and the damage (or lack of) that this is doing to the financial bottom line of the business.
However using lost Customers alone as the measure of the impact of the Customer Experience that you provide on the bottom line your company is misleading and dangerous as Customer Experience affects much more than just lost Customer numbers.
A good way to visualize the full impact that the Customer Experience you deliver has upon your fiscal bottom line is as an iceberg.
Above the water it is easy to see the number of Customers that you have lost. However, below the water the even greater damage that you are doing to your business is in the lost acquisitions. You can loose to your competitors without even realizing it. Word of Mouth will act as a double edged sword killing potential sales and raising your cost of Customer acquisition.
How 'Word of Mouth' influences Customer purchase decisions
'Word of Mouth' is the act of consumers providing information to other consumers about a product or service. It can take either a positive form where a person recommends purchasing from a company or a negative form where a person spreads news about a bad experience to their friends and colleagues.
Recent research from Purdue University has shown that 87% of people follow the opinion of their friends and family in their own purchase decisions.
'Word of Mouth' is a very powerful sales and marketing tool for an organization with its ability to either promote or negate significant facets of the marketing campaigns that you are running. Research has shown that every time a potential Customer hears a negative comment about a product or service from a trusted friend or colleague it takes 5 new advertisements to overcome the impact of the negative comment, pushing up the cost of new Customer acquisition significantly. Unchecked negative 'Word of Mouth' will grow your Customer Experience Iceberg increasing the chances of your business ending up with a fate like the titanic!
Show Me the Money
So does 'Word of Mouth' impact in any significant way upon revenue growth and profitability for companies? The answer to the question posed above is a resounding YES and it probably has much more impact than you currently imagine.
There has been significant research done in the USA and the UK in companies across a range of industries, mapping revenue growth against Customer Advocacy Scores (or Net Promoter Scores), and studying the correlations.
Customer Advocacy Score is a measurement based on the number of positive 'Word of Mouth' recommendations against the number of negative 'Word of Mouth' comments with the results converted into a percentage with a range from (very bad) -100% up to 100% (excellent).
Research by the London School of Economics found that 'Word of Mouth' was found to predict sales growth for retail banks, car manufacturers, mobile phone networks and supermarkets in the UK. (need to validate the revenue base that supports the figures in bullet point 3 and 4 below, here). Their specific findings included:
- Companies enjoying higher levels of 'Word of Mouth' advocacy such as HSBC, Asda, Honda and O2, grew faster than their competitors
- In cash terms every 1 point increase in 'Word of Mouth' Customer Advocacy score correlated with an £8.82 million increase in sales (7 point increase in Advocacy correlated with a 1% increase in growth)
- A 1% reduction in negative word of mouth would lead to £24.84m additional revenues; every 2% reduction in negative word of mouth correlated to just under 1% growth
With company revenues and sales growth so closely tied to 'Word of Mouth' and Customer Advocacy, its little wonder that savvy companies are working to shrink their Customer Experience Icebergs.
Avoiding a fate like the Titanic
Knowing that there is an iceberg floating in the sea ahead of you is one thing; taking action to make sure it doesn't sink your business is another altogether, fortunately there are steps you can take to shrink your iceberg:
Step 1 - Know where you are starting from
Before you can navigate your way successfully on any journey you first need to know where you are starting from. Research has shown that most companies are oblivious to the experience that they deliver to their Customers.
To determine where your Company is currently positioned you will need to audit a cross section of your Customer base, capturing a definitive Customer Advocacy Score, this will give you an measuring point to start from so you can check you progress along the journey.
Step 2 - Target where you want to go and plot your course
Once you have established your current position it is time to set targets for your business that you want to reach and use these as management KPI's, tracking your performance throughout the year with regular Customer follow up audits, holding your team accountable when Customer Advocacy targets are not met.
Step 3 - Act on your Audit results
The businesses that have the best long term growth prospects are those who are prepared to make strategic decisions even if sometimes that means spending more money in the short term to improve the Customer experience.