You know I’m a fan of Southwest Airlines and a complainer about AT&T Wireless. But how much are my opinions actually worth to those companies? An former client, Satmetrix, has devised a back-of-the-envelope exercise that shows how to calculate the value of word-of-mouth (WOM, pronounced “wom”.)
Start with the following assumptions:
1. The lifetime value of a customer before considering WOM is $1000.
2. Promoters buy more at higher margins and defect at half the average rate, so their value before WOM is 3 times that of an average customer.
3. Detractors’ lifetime value is half that of the average customer due to complaints, higher service costs, and short tenure.
4. On average, Promoters make 4 positive referrals, 0 negative referrals.
5. On average, Detractors make 0 positive referrals, 3 negative referrals.
6. It takes 6 positive referrals to generate a new customer.
7. Each negative referral neutralizes 4 positives.
Based on these assumptions, you can now calculate the following:
1. What is the full value of a promoter compared to an average customer?
2. What is the full value of a detractor?
3. What is it worth to convert a detractor into a promoter?
The results may be eye-opening, and will certainly show why it’s smart to be good to your customers instead of treating them like crap. If you like this exercise, it’s worth converting the formulas into numbers that are are more reflective of your experience with your own customers. Have fun!