Does your company have a disaster recovery program for negative word of mouth?

Over the Easter weekend, social networking sites and blogs exploded with negative publicity about online retailing giant Amazon.com. Angry customers are protesting changes on Amazon’s site that lost sales ranking data for hundreds of books dealing with homosexuality, meaning that these books can no longer be found via keyword or subject searches or on best-seller lists.

Amazon appears to have been taken by surprise by the outrage – #amazonfail was the top-trending term on Twitter, and a Google bomb initiated by a popular blog for romance readers successfully redirected searches for “Amazon rank” to a snarky explanation of the issue before Amazon responded at all.

The initial response was a terse press release explaining that the de-rankings were the result of a “glitch” in the sales-ranking feature. A skeptical public declined to believe this explanation, which is widely perceived as a cover-up for a change in corporate policy – or an overzealous application of the existing policy. And it seems likely that Amazon’s customer service reps are being flooded with angry calls and emails. A subsequent apology included a more detailed explanation that the glitch was due to "an embarrassing and ham-fisted cataloguing error," but conspiracy theories continue to circulate in the blogosphere.

No doubt Amazon’s slow response was due in part to the holiday weekend. It also seems likely that they didn’t have a good plan in place for dealing with a grassroots campaign of this sort. Ironically, Amazon has been a trendsetter in leveraging positive word of mouth, but it seems they were unprepared for the way that negative publicity can also spread rapidly on the Internet.

No one likes to think that a technological glitch or a bad decision by a single employee could result in a PR firestorm. But if something like this happened to your company, what would you do to contain the situation and turn it around?

Here are some suggestions for managing negative word of mouth:

• React quickly. Monitor user-generated content on your site, customer service complaints, and word of mouth in other venues. If you see a particular topic cropping up repeatedly, don’t delay. Proactively letting people know that you’re aware of the situation and that you’re actively seeking more information shows you care about your customers and that you’re eager to respond to their feedback. The Internet never sleeps! Identify an escalation point for issues that arise during off-hours so that your official response isn’t delayed until regular office hours.

• Be as transparent as possible. If you don’t have answers yet, just say so. Your customers are smart enough to recognize vague prevarication, and they’ll appreciate your honesty. When you’ve identified the problem, give a clear, understandable explanation of what went wrong and how you’re going to fix it.
• If you’re at fault, apologize. A clear admission of responsibility and a commitment to resolve the issue will go a long way towards counteracting the negative publicity.
• Don’t rely on traditional media to get the word out. Leverage the same tools your detractors used to get your story out there. Post about it in your corporate blog, tweet about it, and educate customer service reps on how to engage with your customers on social networking sites.

All companies hope they never have to deal with such backlash, but customer feedback – positive and negative – is valuable, and it's critical to not just listen, but to act.

Now, I have nothing against Sprint. But I find it fascinating that in this day and age the way we consume information is so dependent upon Web search results. We spend more time consuming media online than in any other medium. If you are considering Sprint as a customer and searching for "Sprint customer service" on Google to learn about the experience you may have with them, 30% of the first ten matches are negative and 20% are about them firing high maintenance customers.

This highlights a modern day challenge. Firing bad customers deserves more consideration in today's "global village". I'm guessing that Sprint made this decision on an almost purely financial basis. Some of these customers were calling them 24 times per month. Perhaps these are just high maintenance individuals. We all know them – no matter what you do, they are never happy. If I called my mobile provider's customer service department every time I had a dropped call, I would be calling them often – maybe even 30 times per month. And some customers probably do call every time there is a dropped call. I don't know if these 1,000 customers fall into that category or not. That is why I put "bad" in quotes for the title of this post. Only Sprint knows how bad these customers truly are.

But did anyone at Sprint consider the reputation impact of this cost-cutting action in today's networked world? If not, I'm sure they will next time. This story has been everywhere. First, I heard it on the radio. Then I saw it on CNN at the gym. And now it is literally all over the Web!

One of my most memorable classes at Wharton's MBA program was Dr. Eric Clemons' class on using information as a competitive weapon. He taught us about how credit card companies had used their superior customer database systems to identify and fire their worst customers (e.g., those that would have the highest debt write-off) by enticing them to transfer their balances to competitors. As bad customers transferred in droves, it almost put their competitors out of business as they didn't have the same type of customer forecasting capabilities and therefore couldn't proactively address the issue until it was too late.

So, I think back to what I learned in Dr. Clemons' class and Sprint's recent action. Perhaps Sprint knew that high maintenance customers would tell other high maintenance customers thus sending these bad customers to other mobile providers. Perhaps they calculated the word of mouth cost of this action before taking it. Perhaps they thought that this story would actually educate high maintenance customers not to come to Sprint in the first place. But given the way Sprint seems to be playing defense with the press instead of offense, my guess is that they didn't – it was probably a purely financial decision, a cost-cutting move.

In any case, I'm sure Sprint and other companies are now thinking about how networked the customer has truly become so that future cost-cutting actions take this issues into consideration. However, you can't satisfy everyone. This logic may seem outdated – it may run counter to some of the recent word of mouth practices. But it's true. Businesses are still in business to make a profit, and not all customers are a good fit.

At Bazaarvoice, I have learned that knowing who is writing a review is sometimes as important as the actual content. Is the review written by your best customer? Your worst? This puts into context the information. Not all word of mouth will be positive. That's a given. But when you are a merchant deciding on the actions to take from either highly positive or highly negative reviews, it is important to know who those customers are. One of our clients, PETCO, proactively contacts high-value customers when they write a negative review. The bottom line: digitally-archived word of mouth will be married with the time-tested methods of information strategy taught by Dr. Clemons.

Update 7/12: One of our Community Managers sent me this story at The Consumerist. There may be more to this than Sprint's PR people were willing to speak about publicly.

I also wrote about how Netflix would eventually launch digital streaming of movies, which would change the game yet again.  That would take away the only serious deficiency Netflix has versus Blockbuster – again, the immediacy of movie delivery.  What I didn't imagine is that it would happen so quickly.  The Associated Press had a great story on Netflix's new "Watch Now" feature yesterday.  One thousand movies and TV shows are available to 250,000 subscribers (for free) and they will be rolling this out to an additional 250,000 each week through June.  And Netflix is spending big money on this – $40 million to cover the licensing and overhead costs, which will cost them greatly at their current operating profit of $17 million per quarter (compared to Blockbuster's $1.9 million).  There is a lot of speculation by individual investors about the two giants battling it out, and a great deal of trading volume. 

I have to wonder if Netflix made this move not just because of Blockbuster but based on Apple's recent announcement of the Apple TV.  Apple has been a huge catalyst for digital music downloads due to the viral success of the iPod.  If Apple TV is executed well, it will become a similar catalyst for digital movie downloads, and Netflix will be well positioned versus Blockbuster.  Netflix's recent move is a difficult one for Blockbuster for copy, but Apple's iTunes may be the real competitor.

There are many word-of-mouth lessons to be learned in watching these two battle it out:

• Netflix capitalized on the negative word-of-mouth that Blockbuster had generated due to its "bad profits" – the late fees that we all grew to hate; Netflix's campaign launch was "the end of late fees" (all they really needed to say due to the bad profits doing most of the talking for them); Netflix pioneers many "sticky" social networking and community features along the way, including ratings and reviews and great collaborative filtering.
• It takes Blockbuster no less than four and a half years (during which Netflix's value grows eight-fold) to battle back due to the inertia caused by them being a franchise and not wanting to kill their most lucrative profit source (late fees); Blockbuster's campaign slogan for "Total Access" is "never be without a movie".
• It takes Netflix only four months to launch "Watch Now" and aggressively start rolling it out to (presumably) its best customers first to stop them from leaving to go to Blockbuster (or, alternatively, movie download sites like Amazon.com's Unbox, CinemaNow, Movielink, or iTunes once Apple TV is launched).

I look forward to seeing how the rest of this movie plays out.

And speaking of online video streaming, we are proud to launch online video upload for customer reviews.  Many of our clients will be launching video-enabled reviews over the coming months.

Update 1/25:
Netflix reports a very solid quarter with a record-low churn rate and 654,000 new subscribers (for a total of 6.32 million).  However, Blockbuster is projecting that it will be at 4 million subscribers by the end of 2007 (Netflix is projecting between 8-8.4 million by the end of 2007).  The battle rages on.

Round two is getting a little more interesting, as Blockbuster finally starts to leverage their stores to create a potentially more positive word-of-mouth offering. In today's Wall Street Journal, Blockbuster announced that they are letting subscribers of Netflix rent movies for free through Dec. 21 by simply walking into one of their stores and redeeming the tear-off address flap from the signature red Netflix envelope for the free rental. This is a promotion for Blockbuster's new "Total Access" feature, which lets customers return DVDs rented through its online service, which competes directly with Netflix, in their stores. Blockbuster announced Total Access in the November 1 edition of the Wall Street Journal with the following quote from their CEO:

"Customers shouldn't have to choose between renting online versus in-store, and they should never have to be without a movie," said Blockbuster Chairman and Chief Executive John Antioco in a statement.

This is a smart strategy as it enables Blockbuster to leverage something Netflix doesn't have – 8,500 stores located across 29 countries. It will ultimately lead to some positive word-of-mouth for Blockbuster, and a new competitive differentiator against Netflix. I, for one, plan to try this out over the holidays as the only downside to my Netflix subscription is sometimes I don't plan far enough ahead to have the movie I want when I want it.

However, it is hard to imagine that this will lead to a long-term competitive advantage for Blockbuster. The next wave that will hit is movie downloading, which will solve the only real challenge Netflix has (the wait time). And Netflix is planning to lead in that wave. Check out Reed Hastings' recent interview on 60 Minutes. And don't get me started on how great of a job Netflix does in creating high switching costs (or "community stickiness") with all of its great ratings and social networking features. Even though I will try Blockbuster again as a result of this promotion, it is unlikely I will dump Netflix.

What is the lesson learned here? Leverage your multichannel assets, like Blockbuster is finally doing, to earn "good profits", especially in the face of a competitor acting on your source of bad profits. This will help offset the negative word-of-mouth that your bad profits have generated with positive word-of-mouth. Also, reducing your sources of bad profits now will help prevent disruptive upstarts in the future. This is much harder to do than it sounds, and the book The Innovator's Dilemma does the best job of any I have read in explaining why.

Update: I just saw that Reed Hastings won the "Innovator of the Year Award" from the NRF (National Retail Federation), the parent of Shop.org.

Speaking of bad profits, I was especially intrigued this morning to read about my friends at 1-800-FREE-411 (Jingle Networks). TechCrunch reports that 1-800-FREE-411 has already received 100 million 411 calls! It has taken over 3% of the $8 billion 411 market. I know the CEO of this company (he founded Flycast with a fellow Wharton MBA graduate from my class), as well as their early investor Josh Kopelman, who is also an investor in Bazaarvoice and the founder of Half.com. I consider these two some of the smartest people I am fortunate enough to know. This is another stunning example of bad profits creating an incredibly huge and disruptive market opportunity. 1-800-FREE-411 has the easiest marketing slogan I have seen in a long time – everything you need to know is right there in the phone number. To learn more about what created this opportunity, check out Josh Kopelman's great blog post.

There are so many recent examples of bad profits in action. Think of the incredibly disruptive Skype, which yesterday had over 8 million users online. The negative word-of-mouth from exorbitant long distance fees paved the way for Skype's success. And, of course, everyone knows by now that eBay bought them for $2.6 billion.

Where are the bad profits in your industry and how can you capitalize on them?

Do you have any bad profits yourself? One example I can think of in retail is the difficulty of returns when you have a bad experience with a product. Costco capitalizes on that by providing unlimited returns on all items (i.e. buy a TV, save the receipt, and you can literally return it 2 years later if it breaks). Their only exception is for computers – there is a 6-month policy on those. I have been tracking Costco's success for years to see if this incredibly customer-friendly policy would hurt them. Quite to the contrary, Costco has thrived as a result. I encourage you to read my friend Gary Stein's blog for more analysis on Costco.

If you are a Bazaarvoice client, we suggest you measure your word-of-mouth promoters and detractors with our Net Promoter service. We haven't promoted it as well as we should (we'll change that), but it is truly powerful and will illuminate any potential sources of "bad profits" and word-of-mouth detractors.

And now enjoy the free 411 calls!