Tag Archives: financial performance

Does Customer Recommendation Predict Company Growth?

Fred Reichheld

Fred Reichheld

Net Promoter Scores gauge customer loyalty, expressed by willingness to recommend and advocate the company’s products and services to others.

Its creator, Fred Reichheld of Bain & Company, posited that NPS is a more meaningful measure of a company’s relationship with its customers than customer satisfaction metrics because, he argued, it is correlated with revenue growth.

Richard Owen

Richard Owen

Satmetrix Executives Richard Owen and Laura Brooks further articulated this linkage between customer loyalty and revenue growth.

NPS’s customer loyalty metric is based on 10-point ratings in response to just one question: How likely is it that you would recommend our company/product/service to a friend or colleague?

Laura Brooks

Laura Brooks

“Promoters” respond with a score of 9 or 10 whereas “Detractors” provide ratings of 0-6, and scores of 7 and 8 are ignored in this system, leading to the question of why they are included.
NPS is calculated by subtracting the percentage of customers who are Detractors from the percentage of customers who are Promoters.

Timothy L. Keiningham

Timothy L. Keiningham

Critics, including Ipsos Loyalty’s Timothy L. Keiningham, Bruce Cooil of Vanderbilt, BI Norwegian School of Management’s Tor Wallin Andreassen, and Lerzan Aksoy of Fordham, argue that American Customer Satisfaction Index (ACSI) is an equally accurate predictor of revenue growth.

They reinforced the frequently-replicated finding that actual behaviors, including positive and negative “word of mouth (WOM)are better predictors than attitudes about possible future behaviors, in their evaluation of longitudinal data from 21 firms and 15,500-plus interviews from the Norwegian Customer Satisfaction Barometer.

Claes Fornell

Claes Fornell

Likewise, University of Michigan’s Claes Fornell, Forrest V. Morgensen, and M.S. Krishan, with Sunil Mithas of University of Maryland, found that “it is possible to beat the market consistently by investing in firms that do well on the ACSI.”

Companies that invest in initiatives to increase customer satisfaction, reflected in higher scores than competitors on the American Customer Satisfaction Index (ACSI), also performed better in measures of market value.

More surprisingly, they found that these higher returns are associated with lower stock market risk, probably due to “stock market imperfections” that require time to adjust to news of strong ACSI performance.

Bob Hayes

Bob Hayes

Similarly, customer satisfaction and loyalty researcher Bob Hayes contended that “likelihood to recommend” measures the same construct and has the same predictive value of business growth as customer loyalty questions such as:

  • Overall satisfaction
  • Predicted likelihood to purchase again, evaluated through his Purchasing Loyalty Index (PLI)
  • Number of referrals through “word of mouth” and “word of mouse,” calculated in his Advocacy Loyalty Index (ALI)
  • Resistance to defection to competing offers, measured with his Retention Loyalty Index (RLI).

    Hayes Customer Loyalty Grid

    Hayes Customer Loyalty Grid

Hayes’ findings reinforced the caveat that actual behavior is a more accurate than attitudes about likely future behavior, also demonstrated by University of Connecticut’s V Kumar, J Andrew Petersen and Robert Leone in their analysis of telecoms and financial service customers willing to recommend their service provider.

V Kumar

V Kumar

Only about one-third of these potential Advocates actually recommended the provider, and only about 13% of those referrals actually led to new customers.
Kumar and team called this the “promise gap” and suggested that it can be mitigated by delivering beyond customer expectations, even when a customer complains.

Neal A Morgan

Neil Morgan

Indiana University’s Neil A. Morgan and Lopo Leotte Rego of University of Iowa added a wrinkle to critiques of Net Promoter Scores as the sole necessary indicator of customer satisfaction.

Like Keiningham’s team and Hayes, they found that recommendation intentions (“net promoters”) have “little to no predictive value.
Unlike Hayes, their results found little predictive strength for actual behavior in average number of recommendations.

Instead, Morgan and Rego argued for multiple measures of customer satisfaction as the best predictor of revenue group.
Additionally they found that Top 2 Box satisfaction scores – the sum of percentages for the top two point on surveys of purchase intent, satisfaction or awareness – provided “good” predictive value.

Daniel Schneider

Daniel Schneider

The Net Promoter Score also had the lowest predictive validity when compared to three other scales by Stanford’s Jon Krosnick and Daniel Schneider, with Intuit’s Matt Berent and Hays Interactive’s Randall Thomas.

To improve the NPS, the team recommended replacing the 11 point unipolar rating scale with a 7 point bipolar scale from positive to negative impressions.

Jon Krosnick

Jon Krosnick

Their work replicated Hayes’ finding that liking and satisfaction with a company are highly significantly predictors than the likelihood of recommending, so Krosnick’s team recommended including questions like:

  • Overall, how satisfied are you with the each of the following companies?
  • How much do you like or dislike each of the following companies?

They uncovered correlations among measures of customer experience, and showed that liking is the best predictor of the number of recommendations and satisfaction.

Leon Festinger

Leon Festinger

Customers typically form more positive evaluations after the decision to purchase, probably due to validating purchase choices and reduce cognitive dissonance of purchase dissatisfaction, described by Stanford’s Leon Festinger.

These findings suggest that Reichheld’s claim of NPS as “the only question you need to ask” may be unsubstantiated, and that multiple measures of customer experience are more accurate predictors of a company’s revenue performance.

-*How credible is “willingness to recommend” a company as a predictor of its revenue growth?

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Executives with Daughters and Sisters: More Generous?

Michael Dahl

Michael Dahl

Cristian Dezső

Cristian Dezső

Male CEOs paid employees more after the birth of their first child when it is a daughter, but paid employees an average of $100 less annually after the birth of a son, according to Michael Dahl of Aalborg University with University of Maryland’s Cristian Dezső and David Gaddis Ross of Columbia Business School in their study of more than 10,000 Danish companies between 1996 and 2006.

David Gaddis Ross

David Gaddis Ross

Female employees typically received higher wages after the birth the CEO’s first child of either gender, and were less adversely-affected than their male colleagues by wage decreases after the birth of CEOs’ children.

Paul Van Lange

Paul Van Lange

People with more sisters tended to show more generous “pro-social” behaviors in laboratory studies of 600 volunteers who played a simulation game requiring decisions about resource-sharing with strangers, according to Paul Van Lange of Free University in Amsterdam with colleagues Ellen De Bruin, Wilma Otten, and Jeffrey Joireman of Washington State University.

Jeffrey Joireman

Jeffrey Joireman

Alice Eagly at Northwestern University suggests that men with sisters are significantly more likely to help others, based on her meta-analysis of 172 research studies.

Alice Eagly

Alice Eagly

In addition, she noted that men tend to help women more than other men.

Men behaved more generously when the cost was minimal in a modified dictator game, according to James Andreoni at the University of California, San Diego and Lise Vesterlund at the University of Pittsburgh.

James Andreoni

James Andreoni

In contrast, they noticed that women demonstrated greater generosity when the cost was high.

Lise Vesterlund

Lise Vesterlund

Andreoni and Vesterlund suggest that men are more responsive to price changes when mens “demand curves for altruism” cross those of women.
As a result, in this lab simulation, men behaved either extremely generously or selfishly, but women shared gains more equally.

Women’s direct presence on corporate boards – rather than their influence as sisters or daughts –  was correlated with increased economic value, according to Dezső  and Ross’s evaluation of the S&P 1,500 firms’ financial performance between 1992 and 2006.
Boards that included women generated an average of 1 percent more economic value – more than $40 million each – when the firm’s strategy is focused on innovation.

-*What corporate impact have you seen of male executives with daughters and sisters?

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Genes and Neurotransmitters Influence Investment Risk-Taking: Implications for Taking Career Risks?

Camelia Kuhnen

Camelia Kuhnen

Brian Knutson

Brian Knutson

Camelia Kuhnen, then of Stanford with her Stanford colleague Brian Knutson and Vanderbilt’s Gregory Samanez-Larkin posit a small but meaningful genetic basis to risk-averse financial investing, providing a biological basis for findings that women hedge fund managers outperformed male counterparts.

Volunteers with two short serotonin transporter genes (5-HTTLPR) reported that they tend to worry, and this pattern was associated with chosing less risky investment choices.

Gregory Samanez-Larkin

Gregory Samanez-Larkin

“Short allele carriers” also showed higher levels of the personality trait “neuroticism,” but no significant difference in cognitive skills, education, or financial status.
Kuhnen estimates that less than 30 percent of variance in risk-taking is attributable to short 5-HTTLPR, and the remaining difference is derived from experience, culture, education, and social environment.

Kuhnen and Knutson reported the neural basis of financial risk taking using event-related fMRI.
They observed that the nucleus accumbens was activated before volunteers made risky choices and made risk-seeking mistakes.
In contrast, they found that the anterior insula was activated before risk-free choices and risk-aversion mistakes.

They proposed that different neural circuits are associated with differing emotions as volunteers anticipate gain or loss associated with financial choices.
This emotional activation “signature” can lead to specific investment choices, favoring or avoiding risk, and may lead to investing mistakes.

In unpublished research, Kuhnen found that short-allele carriers showed increased anxiety before making a decision in a trial-and-error risk discovery task, but reacted no differently than long-allele carriers when they observed a negative outcome.

She noted that volunteers differ in how they anticipate and react to a potential decision before they make it rather that in their reactions to actual outcomes of investment decisions.

Joan Chiao

Joan Chiao

Kuhnen, now at Northwestern collaborated with Northwestern colleague Joan Chiao to investigate the impact of both the 5-HTTLPR gene and the DRD4, gene, which regulates dopamine transmission.
These genes and their related neurotransmitters have been linked to emotional behavior, anxiety and addiction.

Their research replicated Kuhnen’s earlier finding that individuals with two short 5-HTTLPR alleles take 28% less risk than people with other combinations, and they demonstrated that the double DRD4 7 allele carriers took 25% more risk than people with other combinations.
They conclude that serotonin is associated with risk-averse investment choices, whereas dopamine is associated with riskier choices.

Kuhnen and Chiao argue that risky investment behavior shares commonalities with other risky behaviors like drug use, gambling, unsafe sex, dangerous physical and social pursuits, and more.

-*How do you determine the right amount of risk to undertake in career development and financial investing?

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Women Hedge Fund Managers Outperform Male Counterparts

Meredith Jones

Meredith Jones

Meredith Jones of Rothstein Kass, reported  that female hedge fund managers significantly outperform their male counterparts in Women in Alternative Investments: Building Momentum in 2013 and Beyond .
In the third quarter of 2012, women scored a net return of 8.95% compared to a 2.69% net return overall on the HFRX Global Hedge Fund Index.

Given women’s superior contribution to profitability, they would seem qualified for leadership roles in organizations seeking to maximize financial returns.
However, women hold fewer than 20% of top jobs in “alternate investment” organizations, according to 366 senior women in hedge funds, private equity, and venture capital.

Respondents attribute this low representation of women in executive roles to:

  • Low interest in remaining in this “alternate investment” sector due to limited opportunities for work-life balance.
    More than 18% of respondents said they wanted to work part-time or flex-time.
  • Few positions available for skilled women to establish a strong performance record.

Similar issues were discussed in Women’s Post-Business School Work-Life Issues .

Jones of Rothstein Kass suggested that some of women’s effectiveness is based on their greater patience and risk-averseness so they are “…potentially better able to escape market downturns and volatility.”

She continued, “…if women do in fact have a different, more risk-averse investing profile, then at least theoretically, their returns, particularly in difficult markets, should be higher than those of their male counterparts.”  

Kelly Easterling

Kelly Easterling

Kelly Easterling and Camille Asaro, also of Rothstein Kass, contributed to the report, which found women’s assessment of their most important professional assets:

  • Professional networks
  • Strong personal and support networks
  • Strategic career planning
  • Willingness to take considered risks
Jean Brittingham

Jean Brittingham

Jean Brittingham of The Smart Girls Way posited additional correlates of women’s effective financial performance:

  • Systems-thinking skills
  • Seeking balance between work and life
  • Caring more about solutions than who gets credit
  • Strong collaboration competencies
  • Persistence when “passionate about something”
Camille Asaro

Camille Asaro

The Rothstein Kass report noted that some U.S. states have mandates for diversity in their asset management firms, and observed an increase in state public pension plans with stated or implied preference for women-owned investment managers.

-*In which industries have you observed women delivering equal or better results than male counterparts?

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