Net Promoter Dominoes
The measure of a happy customer, according to Fred Reichheld, is how willing he is to recommend a business to a friend or colleague. Delighted customers are more likely to remain loyal, continue making purchases, and therefore return higher profits than new customers. While the focus of the "ultimate question" has been on customer loyalty, there's another question that can be asked: are recommendations effective in attracting new customers?
Our intuition suggests that information from a trusted source is important but not critical in making a purchasing decision. Surprisingly, social factors play a far greater role than might be expected in influencing behavior—enough to turn a crowd into a single-minded herd.
A good starting point for understanding herd behavior comes from the theory of information cascades. The idea that we imitate our peers is obviously not new or controversial. But it is worth noting that herding has been seriously studied by social scientists, who have applied it to politics (momentum), crime waves, fads (remember pet rocks?), and financial markets (bubbles).
How might cascades play out in the era of the Internet and social networks? Let's say a net promoter for a new boutique hotel, The Dew Drop Inn, enthusiastically blogs about her stay. Looking for a hotel on a business trip, Andy reads the blog post and has a gut feeling that this is the right place for him as well. He then tweets about his decision on Twitter.
So far, so good. Zack is also researching small hotels and comes across both the original review and Andy's Twitter post. His hunch is that the hotel is not for him. However, there are now two others who rate the Dew Drop highly. Zack notices that this collected public information is shaping his perception or belief about whether staying there is a good idea, ultimately outweighing his own intuition.
The cascade has started! (For more details, see this.)
As new potential hotel customers read the increasing number of thumbs-up reviews on blogs, forums, and "most popular" lists, their beliefs are completely dictated by the crowd.
When the crowd is heading towards a business you own, you’re reaping the benefits of social networks.
Unfortunately, the herd is fickle, and can also be quickly flipped to the other direction if a net detractor, with authority, gains a following. The key point is that a few (in fact just two in agreement, according to the theory) can trigger an opposing cascade.
Providing great customer service helps keep customers. No argument there. But the herd effect also tells us that when satisfied customers write about an experience positively on social media sites, they have disproportionate influence on consumer decisions.
The ultimate lesson? Contact centers that engage customers in the Web 2.0 social arena can have an enormous impact on loyalty, new customer acquisition, and revenue.
Posted by Andy Green at 14:59 on November 16, 2008
Andy Green said..
Posted at 12:10 on November 18, 2008
To get a taste of an information cascade in action, take a look at this simulation: http://www.si.umich.edu/IGD/tutorials/infocascades/applet/applet_t2s1.htm.
A word of explanation. The first circle represents the "truth"--i.e., the hotel is really the right place to stay. ".6" reflects the accuracy of your gut feeling--6 times out of 10 your gut feeling is right. To run the simulation, continue pressing go until get to the last circle. Reset start it again.
You'll notice that most of the time you end up in a cascade where the circles are consecutively T or F
What the simulation shows is that after each person weighs the actions of everyone preceding him, with the first person choosing based on just his own hunch, the crowd most of the times ignores their internal hunches, and becomes a herd. (Technically, you ignore your hunch because the crowd's actions appears to give higher accuracy than .6)