Microeconomics of Customer Relationships

Reading: Microeconomics of Customer Relationships ? Reading: Microeconomics of Customer Relationships The follow is a critique and review of the reading of Microeconomic of Customer Relationships by Fred Reichheld. I will review the article and evaluate Mr. Reachheld. I will also apply economic theories into why and how I came to my conclusions. Overview on the Reading Microeconomic of Customer Relationships by Fred Reichheld is based on a simple survey based customer-relationship metric known as “net-promoter score”, or NPS.
The NPS divides customers into three categories based on the simple question, “How likely is it that you would recommend us to a friend or colleague? ” (Reichheld, 2006, pg. 73) Customers at the high end are labeled promoters, because of their likelihood of loyalty and positive word-of-mouth promotion. The low end of the spectrum is the opposite of the promoter and labeled a detractor. By quantifying the value the customers have the company can then devise action plans to solve problems, or expatiate growth. Evaluation of the Author
Fred Reichheld was very good at relating NPS in a practical and evaluative way. What I found most interesting in his analysis of NPS was the customer grid (Figure 1). Figure 1. Customer Grid. From Fred Reichheld’s Microeconomics of Customer Relationships. (2006, pg. 76) Reichheld came to the conclusion that the upper right was the top long-term priority. I completely agree with this conclusion. He then put the upper right and the lower right as the next highest priority. He does make some good points, such as bad word-of-mouth and high profits that could pick up ship and move on elsewhere.

I, however, would put a higher priority in the upper middle section as long as this is a large corporation. A small business may very well need to stamp out the issues of the unsatisfied because they can’t afford the risk of losing base. In a large corporation, volume is huge and needs to be satisfied. If you can find a way to get the middle column to the right, your NPS would rise. Conversely, if you don’t satisfy the middle, or large volume customers, they could move to the left causing havoc. Netflix recently made a bold move of raising it’s prices 60% and split it’s services into two separate entities.
This angered that middle column of subscribers that used Netflix, but didn’t have strong opinions toward it. Netflix’s stock prices have plummeted 26 percent this year(Randall, 2011). Netflix was counting on customer loyalty to prevail over the increase in prices, but instead had a huge backlash. An example of a company that focuses on the right and the middle of their NPS is Apple. Apple has created a company with an almost cult like following. Apple’s NPS is 79% with only 2% detractors based on a 2008 survey by Satmetrix (Schofield, 2008).
Apple has been genius at getting customers to the upper right section of the customer grid. It developed products to appeal to the masses. Criticism toward Apple has been their lack of Adobe flash integrated into their iphones(Chen, 2008). This causes anger to the left sections of customer who want flash enabled devices. Apple could easily try to appease this group and enable Flash, but because it views it as an unstable platform, it refuses to use it. Apple isn’t as concerned about the haters as it is about those loyal to Apple, or those who are on the fence.
Recent commercials have depicted Apple as more stable and fun to used than PCs, in an attempt to grab at that market with no brand loyalty. Economic Theories I do realize my examples for my disagreement with Reichheld on priority placed on the NPS is not for all market conditions and companies. There are many factors that can sway priority away from where focus was previously. The Netflix example, for instance, was based on a company who thought it had somewhat of a monopoly, yet after it made it’s decision to raise prices realized costumers left for other options such as Hulu plus and Blockbuster’s DVD by mail service.
Netflix is now forced to have its main focus on the left and pacify those who were angered. There is also supply and demand to consider. When there is a high demand for a product and a limited supply, a higher priority needs to be set on the upper right because holding a high percentage of the market share when supply is low will keep customers when or if the supply is increased and you will need customer loyalty when new competitors are able to enter due to a lower cost of entry. Conclusion
Fred Reichheld wrote an excellent article breaking down NPS and applying it to business. I had a slight disagreement over his priority placement mainly because it is flexible to the situation and I would focus on the masses rather and a select few. The article was well written and very practical with easy to understand data. References Chen, B. (2008, November 17). Why apple won’t allow adobe flash on iphone. Retrieved from http://www. wired. com/gadgetlab/2008/11/adobe-flash-on/ Randall, D. 2011, September 19). Nflx tumbles on qwikster announcement; are netflix’s best days behind it?. Retrieved from http://www. huffingtonpost. com/2011/09/19/nflx-netflix-stock-qwikster_n_970879. html Reichheld, F. (2006). The microeconomics of customer relationships. MITSloan Management Review, 47(2), 73-78. Schofield, M. (2008, April 10). Satmetrix benchmarks net promoter scores in four key industry sectors. Retrieved from http://www. reuters. com/article/2008/04/10/idUS191482 10-Apr-2008 BW20080410