Fred Reichheld is author of The Ultimate Question: Driving Good Profits and True Growth, and a true customer loyalty expert. Much of his career has been devoted to understanding and questioning what makes successful businesses so successful? His findings don’t consist of strict “dollars and cents” accounting measures, but rather focus on the fundamentals of good business.

“The only way to grow your business long-term is through this process of turning your customers into your sales force.”
- Fred Reichheld

His Net Promoter Score (NPS) does just that. Measuring your advocacy ratings by comparing promoters to detractors can provide valuable insights into how you are viewed by your customers and what your business priorities should be.

Listen to the podcast: Fred Reichheld Interview

Fred Reichheld: Well, you know this issue of good and bad profits just comes out of my experience that most businesses, especially big businesses use accounting as their primary measurement system. It’s the only one that’s audited, the only one where people go to jail if they cheat. Or the only reliable one.

And one of the difficulties that that raises is that accounting can’t tell us the difference between good profits and bad. There are plenty of profits that are completely consistent with generally expected accounting principles, but they’re just completely bad because they’re inconsistent with Golden Rule behavior. They’re abusive, they’re misleading and they destroy growth and loyalty.

Matt Mierzejewski: Great. So getting away from the profitability, if, in your own words you could explain what the Net Promoter Score is.

Fred Reichheld: Net Promoter Score is our attempt at creating a universal system that is so simple and intuitive that eventually everyone will use it as their accounting system for customer and employee relationships. And as the need for that universal system is obvious, every single vendor in the satisfaction and market research space comes up with their own, unique ‘mine is better’ black box system, because that’s how you earn profits; buy my black box, my expertise. I think the only way we’re actually going to make progress is if we just settle on something that’s open source, everyone has access to it and it becomes an accounting system. And that, I think, should be a Net Promoter System.

Matt Mierzejewski: Makes sense. So let’s say we have our Net Promoter Score. How does one move upward or downward? Namely upward!

Fred Reichheld: It’s not so much focusing on the score. It’s focusing on the categorization process that the key to Net Promoter is I’ve go to categorize customers. Did I win their loyalty? Are they promoters? Did I fail miserably and they’re detractors? And sure, you want to keep track of did I fail just a little bit and they’re passive.

But it’s this focus of the categorization that helps you focus your management priorities and your decision-making throughout the organization so that the companies don’t forget this obvious truth that there’s just no way to grow profitably without earning the loyalty of your customers. And that’s a vague idea but it’s a very crisp idea to say I need more promoters and fewer detractors. And I can measure progress along those dimensions.

Matt Mierzejewski: And for many of our online retailers, any specific tips?

Fred Reichheld: Yeah, make the categorization crisp and straightforward. Make sure everyone in your chain, your front line employees, your vendors and suppliers understand it and start making the appropriate investment to improve. The only way to grow your business long-term is through this process of turning your customers into your sales force. And once again, that’s a really nice sounding but vague idea. But the power of a crisp measurement process, you can actually drive that through your business.

Matt Mierzejewski: What advice would you give to management in conveying this to kind of the front line employees and how important that is?

Fred Reichheld: I think one of the challenges for top management is convincing them this is not just a slight improvement on the dozen historic failed processes that sounded good but never delivered anything on satisfaction. This is a core, hard process just like an engineer would design for minimizing error rates or failure rates. And it has to be understood as a hard core business process, an operational process and not as a research program, nice to check on every quarter when we have time.

Matt Mierzejewski: Fred, we appreciate the time today and good luck in your further customer loyalty expertise and we’ll look forward to reading some more of your stuff.

Fred Reichheld: Well, The Ultimate Question is still awfully relevant and I’m beginning work on the follow-up to that. This idea of you’ve got to get more promoters and fewer detractors is spreading very quickly and I’m feeling very hopeful we’ll see great progress over the next few years.

Matt Mierzejewski: Well, we’re big believers as well. Thanks for your time.

Fred Reichheld: Bye-bye.

Background: I’m a voracious reader. I like playing with technology. I am not usually an early-adopter when it comes to gadgets. I’m involved in a good deal of website usability work at RKG, so I’m highly attuned to user interface design.

My review: two thumbs up.

The Kindle works simply, and it simply works. That is high praise from a UI geek.

Spolsky says, “Something is usable when it behaves exactly as expected.” A high bar, and even higher when applied to a new category of device where user conventions aren’t established. The Kindle easily beats it.

So what have I been reading? Yesterday I picked up Super Crunchers by Ian Ayres (even though I already own the hardback!) and Raising the Bar: Integrity and Passion in Life and Business: The Story of Clif Bar by Gary Erickson.

I read into the evening and am halfway through Raising the Bar. (Excellent book — recommended.) That’s roughly 150 conventional pages. No problems with eye strain, no problems with learning or using the UI.

Arthur C. Clarke observed that sufficiently advanced technology is indistinguishable from magic.

Clarke was right, but here’s Alan’s Corollary to Clarke’s Third Law: we’ve become so anesthetized by the rapid pace of technological evolution that

Clarke’s “magic” fades to commonplace in 5 minutes.

Really. The Kindle is an absolutely incredible technological feat on many levels. The display is really good. It is mind blowing to think about the breadth of its library.

I showed the device to about a dozen people yesterday. Most had never heard of the Kindle until I handed it to them. All have found the Kindle amazing, remarkable, even magical.

And after each person played with it for several minutes, by the end of that short interval, each fully accepted the whole idea — that is, an electronic reading device with sharp digital ink with wireless access and one-click shopping and 200 on-board books — to be utterly normal and commonplace. Within minutes. Wow.

Here are my impressions of the device, in no particular order.

Kindle Elements Which Work Really Well

• The screen and the digital ink — quality, resolution
• The UI makes sense — no learning curve
• Highlighting and adding notes — very elegant to set, review, search, and unset
• The ergonomics of the physical device, placement of buttons
• On-Kindle search: any phrase across all texts on device
• It holds your page in each book — when you return, you’re right where you left it
• You can “turn down” or “dog-ear” the corners of pages
• The little keyboard is decent
• The fact it connects like a cell phone, and you don’t have to mess with WiFi and USB cables
• Battery life seems strong
• Kindle Store: integration with Amazon reviews and ratings, and the ease of purchase (dangerously easy — online retailers take careful note! Seriously)
• The speed at which a purchased book arrives
• The pretty screen saver pictures
• Hyperlinks work, bringing up the web page on the Kindle browser
• The leather case
• The silver digital ink in the long right scroll bar
• The animations used in the long right scroll bar
• The packaging and out-of-the-box experience

Kindle Rough Edges

• The “black flash” on each page turn
• At the smallest font setting, the letters aren’t sharp enough
• If not using the smallest font setting, a fast reader needs to flip pages really frequently
• Pictures are fuzzy and low quality
• Not sure how to zoom in on an image
• Connecting to Kindle Store is slow
• Searching Kindle Store is slow
• Sometimes images on search results are delayed
• On pages the text rises and falls below baseline (see Raising the Bar, location 876-881, “…but as we cycled we noticed lots of small roads…”)
• If the connection to the store or web is slow, and you use the time to go back to reading, each “still trying to connect” interrupt yanks you away from your reading back to the main menu
• Only black-and-white, no color
• The “Amazon has gagged us and so we can’t answer questions about the Kindle” email responses I got from customer support at NowNow. Dumb.

This review is after having the device for less than 24 hours. I’ll try to make a note to come back and give my impressions in a few weeks — will I find the Kindle has become indispensable, or just an occasional-use gadget? Time will tell.

May your website enjoy huge traffic.

A blessing, as all site managers crave a deluge of visitors and buyers.

A curse, because if your site becomes wildly successful, you’ll have to learn how to scale your site. When traffic soars, small things that never before caused concern can grow into thorny problems.

I just finished up Building Scalable Web Sites by Cal Henderson, Engineering Manager at Flickr.

I enjoyed the book and would recommend it. It isn’t a textbook — it would be impossible to write a definitive textbook for a topic as far-ranging as site scaling — but rather reads like a well-organized conversation with Cal.

Most interesting for me was reading Cal’s description of Flickr’s pain points and how they overcame them. You can feel from his writing how Flickr struggled with Unicode, malformed email from cell phones, mysql scaling, spoofing and XSS attacks, etc.

If you’re a retailer running a home-grown e-commerce stack, your engineers will benefit from reading Building Scalable Web Sites.

Here’s the video:

video link

Here’s the page of links mentioned in the video: rimmkaufman.com/nemoa2008

This talk does not have any grand unifying theme. Rather, it is a random grab-bag of Marketing 2.0 ideas related to online retailing that I find cool. The intended audience was catalogers, so some of the topics or suggestions may be less novel to folks hanging out on the cutting edge of the blogosphere.

I recorded the talk and optimized the Camtasia recordings for Youtube. Boof — some sections were just a smidgen longer than YouTube’s 10 minute rule. So instead I put them on Yahoo’s JumpCut. That’s why the video looks like five sections spliced, and why the image quality isn’t great — it seems optimizing production for YouTube is less optimal for JumpCut.

Souder has worked at Yahoo since 2000. His current title is Chief Performance Yahoo!.

Steve’s job is making Yahoo pages load quickly.

His book lays out 17 fast-and-easy techniques to speed up your site.

Except for Tip #2 (Use A CDN), these tips are essentially no cost.

Really.

Like many, I’d always thought the bottleneck for most large sites was database access. So speeding up a site meant more indexes (read: buy more disk), faster processors (read: upgrade your servers), and more database-savvy apps (read: costly refactoring).

While these three can bottleneck your performance, Souder describes how front end design choices can slow down or speed up a site by 10 to 20%.

Simple little things. Expires headers. CSS sprites. Gzipping. Smarter DNS. Amazing that little things can matter so much.

Are your IT folks already doing all this? Probably not. Souder grades the web’s biggest sites and finds that even among online leaders these best practices are used inconsistently. Sure, Google and CraigsList are really fast, but they also send really lean pages. Yahoo is a more interesting case: it sends really fat pages (images, content, code), but their pages load fast regardless.

If you’re not a tech person: Souder’s 17 tips are mostly server and page configuration options. There’s IT effort to do them, but typically not much.

(It is as if some credible person let you in on the secret that — I’m making this up — “salespeople with their phone numbers above their name on their business card on average sell 10% more each month than salespeople with their phone number below their name.” And they were right.)

Here are the book’s chapters:

• Chapter 1: The Importance of Frontend Performance
• Chapter 2: HTTP Overview
• Chapter 3: Rule 1: Make Fewer HTTP Requests
• Chapter 4: Rule 2: Use a Content Delivery Network
• Chapter 5: Rule 3: Add an Expires Header
• Chapter 6: Rule 4: Gzip Components
• Chapter 7: Rule 5: Put Stylesheets at the Top
• Chapter 8: Rule 6: Put Scripts at the Bottom
• Chapter 9: Rule 7: Avoid CSS Expressions
• Chapter 10: Rule 8: Make JavaScript and CSS External
• Chapter 11: Rule 9: Reduce DNS Lookups
• Chapter 12: Rule 10: Minify JavaScript
• Chapter 13: Rule 11: Avoid Redirects
• Chapter 14: Rule 12: Remove Duplicate Scripts
• Chapter 15: Rule 13: Configure ETags
• Chapter 16: Rule 14: Make Ajax Cacheable
• Chapter 17: Deconstructing 10 Top Sites

You can read most of the book for free on O’Rielly’s table-of-contents page (mouse-over and click the sections on that page to expand), but don’t. Buy it instead. $20 at amazon, $30 at orielly.

Heck, buy two copies for your IT team. The purchase will be your highest percentage ROI decision this year, book cost + IT implementation cost versus increased sales from faster more usable site.

Speed is an often-overlooked component of web site usability.

All other things equal, faster sites sell more.

Buy this book.

I really enjoyed Ian Ayres‘ new book, Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart. The book is easy to read, authentic, and thought-provoking. My only complaint is the index, which isn’t comprehensive enough for such a wide-ranging book.

Ayres’ topic is the growing importance of data mining and randomized testing.

On the data mining side, Ayres trots out the familiar cast of characters: CapOne and predictive modeling, NetFlix and their recommendation engine, WalMart and the pop-tarts story. He goes further, though, discussing Zillow, Inrix, Farecast, and eHarmony.

On the testing side, Ayres thoughtfully describes the rise of randomized testing in health care (evidence-based medicine) and social policy (for example, No Child Left Behind.)

Ayres writes with calm authority — he’s an economist and law prof at Yale, rather than just a popular journalist — covers a great deal of ground in relatively few pages.

My copy of the book is heavily marked as I found myself underlining new ideas and connections. Just a few:

• IRS. Instead of thinking as the IRS as solely a tax service, they could become an information provider, the “Information & Revenue Service”. Is your small business underspending or overspending on advertising? For those who wanted to buy comparative data, the IRS could offer its opinion, benchmarking your numbers against other comparable firms, and correlating the results with growth and profitability. p34.
• 100,000 lives. Don Berwick rolls out six simple ideas from evidence-based medicine (wash hands before placing central line, elevate head of ventilator patients, etc) in 2004, gets more than half of all US hospitals to participate, and saves an estimate 122,342 lives in 18 months. p82.
• Epagogix. Dick Copaken uses regressions to help Hollywood predict (and then improve) box office revenue. p144. Malcolm Gladwell recently wrote about Epagogix in the New Yorker.
• Overconfidence. Humans regularly underestimate the uncertainties in our predictions, leading to many situations where impartial algorithms outperform experts. p112.
• Virginia’s SVPA & the RRASOR. In 2003, Virginia’s sexual predator act became (according to John Monahan), “the first law to specify in black letter the use of a named actuarial prediciton instrument and an exact cut-off score on that instrument.” p120.
• Larry Summers. Former Harvard president Larry Summers didn’t suggest women had lower average intelligence than men, he suggested that the standard deviation of intelligence was higher for men than women.

This book captures the 2007 zeitgeist, weaving together many interesting people and ideas. There are even several memes relevant online advertising.

For example, Ayres used an Adwords copy test to pick his title — “Super Crunchers” beat “The End of Intuition” (p56).

And his notion that “experts” pulling the levers often generate sub-optimal results versus giving solid algorithms more leeway reminds me of George’s post on approaches to PPC management (Navigating vs. Steering: How The Client - Agency Relationship Affects Profits.)

Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart — recommended.

The best all-around introductory book on mathematical modeling is How to Model It: Problem Solving for the Computer Age by Starfield, Smith, and Bleloch.

The book dates back to 1994, but is just as relevant today.

When most direct marketing people talk about “modeling”, they either mean predictive response models, or they mean financial spreadsheet P&L models.

This book goes far beyond these applications, and teaches the skill of crafting novel models to help provide insight into a wide range of problems. It teaches the reader how to think about a problem, craft a mathematical representation, then use that representation

Topics include model scope, heuristics, spreadsheets, risk, stochastic modeling, rudimentary optimization, dynamics, trade-offs, and expert systems.

The book isn’t a dry academic text book. Rather, it is a series of exercises and questions that teach modeling concepts in a hands-on manner.

Highly recommended for analysts in any field.

My beef is not so much about the concept as it is with the name. In order for the numerous, small-quantity products to fall in the tail of a curve, you have to draw the curve like the one above (a replication of the chart on the jacket of Anderson’s book). This is a chart of sales of each product after sorting the products from highest to lowest selling.

And although you can draw the curve this way, it is clearly not the usual way to show the distribution of unit sales across products. No…. the usual way would be to construct a histogram or frequency chart. The Y-axes would be the number of products that had sales in a given range. The X-axes would be the number of sales.

That chart would look like the one below:

(You can see that all I’ve done is switch the labels of the two axes.)

Both charts describe a distribution of sales across products in which a few products sell a lot and lots of products sell a little. The long tail in the top graph reflects the numerous products that sold in increasingly smaller amounts. In the bottom chart, those same products occupy the tall head. The tall head in the bottom chart reflects the large number of products with low number of sales. The bottom chart counts the number of products at each level of sales while the top chart counts the number of sales for each product ranked in terms of sales.

Now neither chart is right with the other wrong. But the bottom chart is more typical. It is the probability distribution of unit sales for a randomly chosen product. There is a large probability the product will sell a small number of units and a very low probability the product will be a hit—and sell a high number of units.

To see that the bottom curve is more typical, simply ask yourself whether the original 1977 STAR WARS movie belongs in the head or the tail of the distribution of all movies.

Clearly, most regular folk (and all statisticians) would say that Star Wars belongs in the tail. It was unusual in its popularity. Unusual events are in the tail (in this case, the upper tail) of a distribution. Just like really smart, tall, or athletic individuals, block-buster hits are several standard deviations above the mean. They are way out in the tail. If all this makes sense to you, then you intuitively use the bottom curve when talking about distributions.

And if you use the bottom curve, Anderson’s long tail is actually a tall head.

If we use the bottom probability-distribution curve to make Anderson’s main point, the chart might look like this:

For physical products with scarce physical distribution, the really small ones never make it to market—creating the short, almost truncated, left tail in blue. Anderson’s main point is that if products and distribution are digital, the economics allow for all products to be sold. The short left tail for physical goods becomes a tall head when things are digital. When things are digital, all products (not just the popular ones) reach the consumers…..and what we find are lots and lots of products that sell in very small quantities. You can think of the red curve above as the natural extension of the blue curve once all products see the light of day. Digital economics adds a tall red head to the right tail of the probability distribution of sales.

But the blockbusters are in the tail, and Anderson’s long-tail items are in the tall head.

This post guest-blogged by Prof. Phil Pfeifer of UVA’s Darden School.

My first reaction to the book’s initial chapters was tepid: “Nothing new here to anyone who reads blogs,” I thought to myself. And I didn’t like the author’s formality, positioning themselves apart from their subject as if writing a master’s thesis.

But McConnell’s and Huba’s book grew on me, and by third chapter, I found I had covered the front endpapers with notes. (Scribbling notes in the inside covers is a habit I picked up from Tim Sanders, who calls it “cliffing”.)

The book presents several dozen interesting ideas and case studies from all across the social media landscape which were new to me, from the mundane (Snakes on a plane) to the historic (the Roman’s Acta Diurna, Gutenberg’s movable type, and the Protestant Reformation) .

A fast light book for and about 2007. If interested in social media, worth a read.

Yvon Chouinard’s amazing book, Let My People Go Surfing: The Education of a Reluctant Businessman is as spare and well-designed as a piece of Chouinard climbing gear. Zero blather, zero self-promotion.

The book has three parts. The first is the story of Chouinard (the person). The second is the story of the companies (Chouinard, Black Diamond, and, primarily, Patagonia). The third part is a series of eight company Philosophies — actual Patagonia documents describing who they strive to be as company, and why. These eight chapters cover product design, production, distribution, image, financial, HR, management, and environmentalism.

The chapters on brand (image) and HR are classic. The recounting of Patagonia’s shift to organic cotton is fascinating. For me, however, the true core of the book is Chouinard’s thoughtful discussions of growth and values. When I finished the book, my first thought was “Wow — what a company those folks have built. No wonder they have 700 applicants for each job opening.” My immediate next thought was, “There’s no way Chouinard and Patagonia could have achieved all of this if they were a public company.”

Let My People Go Surfing: The Education of a Reluctant Businessman: an inspiring testament to the transformative societal power of ethical privately-held businesses.

Highly recommended.