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The Economics of Customer Engagement

The Economics of Customer Engagement

As CEO of Bain & Company during the time Frederick F. Reichheld developed the Net Promoter Score (NPS) methodology, John Donahoe was privy to an in-depth view of the metric few others had. As CEO of eBay, Donahoe has used NPS to determine the link between customer value and churn—and drive change based on that information—to an extent few others have achieved.

When Donahoe joined eBay in 2005 as president of marketplaces, his responsibility included expanding eBay’s core business, which accounts for a large percentage of the company’s revenues.

At the time eBay, an online marketplace with categories that range from antiques to video games, had just reported its financial results: record consolidated net revenues of $935.8 million for Q4 2004, up 44 percent year over year. For the full year of 2004 eBay reported $3.27 billion in net revenues, a 51 percent increase over 2003.

The strong results, under the direction of then president and CEO Meg Whitman, gave Donahoe tremendous momentum going into 2005. With $381 million in operating cash flow, Donahoe’s—and eBay’s—future looked bright.

Donahoe oversaw a number of strategic acquisitions during that time, including Shopping.com, Skype, and StubHub, and several classifieds sites, such as Gumtree and LoQuo. The executive team then faced a challenge common to much more mature businesses: With 70 million active users, there were few customers left to acquire.

“We had just about run out of customers to acquire,” says Aman Verjee, CFO of North American Marketplaces at eBay. “If we really wanted to grow the business, it had to be from deeper relationships.”

Net Promoter Score takes hold
Prior to joining eBay, Donahoe spent more than 20 years at consulting firm Bain & Company. It was Donahoe’s exposure to NPS while there that later helped to shape eBay’s service experience.

To simplify, Net Promoter Score determines customers’ likelihood to recommend a brand or company. Companies ask their customers: “How likely is it that you would recommend our company/brand to a friend or colleague?” Based on their responses, customers are categorized as Promoters (9-10 rating), Passives (7-8 rating), and Detractors (0-6 rating). The percentage of Detractors is then subtracted from the percentage of Promoters to obtain an NPS. A score of 75 percent or above is considered high.

Companies are encouraged to follow the “recommend” question with an open-ended request for elaboration, soliciting the reasons for a customer’s rating. These reasons can then be provided to front-line employees and management teams for follow-up.

According to NPS proponents, asking about the likelihood to recommend allows companies to get a clear measure of their performance through customers’ feedback. Bain analysis shows that sustained value creators—companies that achieve long-term profitable growth—report Net Promoter Scores twice as high as the average company.

Until 2006 eBay didn’t use NPS to gauge customer satisfaction; instead the company relied on occasional surveys to get feedback. But following a global customer satisfaction study, which revealed that eBay customers liked getting deals but feared getting ripped off, Donahoe started taking actions to improve the customer experience. “John Donahoe joined eBay and it was, ‘Let’s try this NPS route,’” says Joe Ordyna (now the CEO and cofounder of Surveynomics), who helped Donahoe bring NPS into eBay.

Even though Donahoe had greenlighted NPS, he and Ordyna had to sell it to the rest of the organization. “It takes a big effort, and it takes getting everyone involved in order to change that culture,” Ordyna says.

“You have to have clear executive sponsorship for the measure,” CFO Verjee adds. “If you don’t have that, there is danger of it getting lost in a cloud of other metrics.”

Ordyna’s team began tracking eBay’s quality assurance calls against customer satisfaction results as one way to gain executive support. “We said, ‘Here’s how you are graded and here’s what [customers] value most,’” he says. “We calibrated the grading for the QA agents with what the customers had to say.” The results showed that internal grading was high and customer grades were low due to a disconnect between how eBay employees operated and how they perceived they delivered customer service.

To close that gap Ordyna went to the heads of the business units and showed them proof about the value of implementing NPS. He forecasted that a loyalty engine implementation would produce operational improvements within six to eight months from deployment. “We said, ‘This is what it means and this is why it’s important for your people to understand,’” Ordyna says. That proof even lured finance into getting involved.

Verjee had always showed an interest in connecting financials and customer metrics. Donahoe’s push to become a Net Promoter organization required a centralized analytics team to ensure its long-term sustainability. “Having a centralized source prevents hidden agendas and conflicting results of taking the data and looking at it just one way,” he explains, adding that if NPS resided within just one business unit, and if finance didn’t get involved, it would be difficult to keep the scores objective.

Ordyna oversaw the integration initiative. He pulled people from the marketing and service teams and put them in a central analytics team within the finance department, and took one of his analytics employees and embedded that person into marketing. The transplanted employees reported back to their original departments on the developments happening in their newly assigned areas. “We created this joint analytics team that brought the top and bottom together,” Ordyna says.

To reinforce the importance of sharing information Donahoe began creating a dialogue around NPS. He held customer summits every quarter where executives and product managers would talk about their experiences with NPS and how they were progressing. “He would ask them, ‘What did you do for the customer and how did you adapt going forward?’” Verjee says.

The company also included the customer in every conversation. “That’s the focus of every meeting,” Ordyna says. “If you didn’t talk about the customer in the first 10 minutes it’s a wasted meeting.”

To mesh the conversations occurring throughout the organization, Ordyna’s team developed a cross-functional process improvement team. The team gathered customer feedback and channeled it through the reengineering process, also providing relevant insight from the feedback to marketing. In the end, that system became eBay’s loyalty engine and the process for driving NPS results through the organization.

NPS—a science and an art
The NPS program at eBay comprises four elements: a bottom-up, transactional-level monitoring approach; a strategic, top-down program for setting priorities; benchmarking to gauge competition; and a process for reaching out to Detractors and Promoters. “There’s a proven science to collecting customer feedback…the art is how you need to shape that methodology to fit your business,” Ordyna says.

eBay gathers that feedback from five areas: a random sampling of buyers and sellers who have been active in the previous three months; the competitions’ Net Promoter Scores; random buyers who have purchased from a competitor’s site in the previous three months; buyers with a recent transaction; and customers with a recent customer service interaction. eBay administers the surveys through a variety of channels—email, mail, and in the IVR. “That allows us to identify support transactions that help us to prioritize business solutions in the future,” says Kellie Cobaugh, senior manager, NPS Resolutions.

The analytical team conducts the initial analysis on the findings. If an issue pertains to a process insight, the team hands it off to the process improvement team. If the feedback relates to product or strategy, the marketing or product development teams receive it. If the feedback discusses operations, then the team sends the scores and feedback to that department. And if the feedback suggests strategic changes, it goes to the executive level. “We call it bubbled-up insights,” Ordyna says.

Using that information executives can easily set priorities for improving internal processes that will also result in a higher NPS. Improvements the company has made so far include increasing the number of agents handling transactions, investing in live chat support, offering coupons for high-value customers and incentives for high-scoring sellers, lowering shipping costs, and providing training for account managers to become proactive in customer support.

To reduce the number of incidents in customer service reported between buyers and sellers, eBay now uses NPS to survey the buyers about individual sellers, asking if they would recommend the seller. Sellers who receive positive remarks and high scores receive coupons; eBay proactively reaches out to those who get negative comments to work with them on their selling skills.

Verjee says the goal is to improve service levels. “Some [sellers] had NPS scores in the 20s. We asked, ‘Is there anything we can do to help the sellers get better?’” (One action eBay recently took was to launch an area on the site where customers can post comments about sellers. If a buyer gives high feedback scores for a seller, eBay will offer the seller incentives.)

Evolution to Net Promoter Economics
In February 2008 Donahoe succeeded Whitman as CEO. eBay had been using NPS for a year. Not only had the company laid the foundation for the metric, everyone embraced it. Donahoe knew he could drive growth by improving how the organization leveraged NPS.

Donahoe determined that growth would come by focusing on four initiatives: improving the end-to-end customer experience, examining how customers used eBay through PayPal, finding customers’ biggest pain points, and identifying ways to improve the customer experience. “We wanted to deepen our relationships—increase loyalty, share of wallet, and our competitive advantage,” Verjee recalls.

Cobaugh says eBay started testing the economic theory of NPS. Her team had already proven in six of eBay’s largest global markets that Promoters spend more money on ebay.com than Passives and Detractors spend.

This solid evidence helped eBay gather the momentum to turn NPS into a methodic science called Net Promoter Economics. The company introduced the new approach at the end of 2008. Verjee describes the current methodology as a transformation of the relationship between the mathematical score given to customer activity and the financial metrics eBay cares about. “It’s a study of churn, the propensity to buy…all the things that determine the lifetime value of a customer. It justifies the business,” Verjee explains.

By incorporating three key metrics—the dollar amount the customers spend, their number of purchases, and churn rate—and combining those metrics with NPS scores, Net Promoter Economics can continuously determine exactly which groups of customers eBay needs to affect in order to move the NPS score and thus gain a percentage of additional revenue.

The initial findings showed that the largest lift in revenue will come from moving Detractors to Promoters because, as Verjee explains, if the company moves Detractors, it increases share of wallet. To determine the potential value of this plan, Cobaugh’s team measured that option and learned that it is five times more impactful than moving Passives to Promoters. The Passives, or satisfied buyers, were still spending on eBay and the company found that it has a limited opportunity to move them to Promoters. But the people who give the negative scores—the Detractors—were leaving ebay.com. With that information, eBay is building a Detractor model that includes a customer problem-resolution strategy. “We’re going after those buyers who churn,” he says.

A specially trained team of employees within customer service now regularly calls Detractors and provides “white glove customer support.” This team focuses on problem solving. “We stopped treating everyone like they were criminals and started treating them like they were valuable assets,” Ordyna says.

To hold everyone in the organization accountable for NPS, eBay is making NPS part of the company’s bonus structure this year, starting with the executives, then with the product teams, design team, and heads of business units. “[NPS] can be a really powerful tool,” Cobaugh says. “It allows you to be much more poignant and to make the right decisions for the right buyer.”

“NPS is showing us how to make things better and smarter,” Verjee says. “We don’t sweat and stress. Transactional NPS data has given us a path forward.”