How J.D. Power Ratings Work

While many believe that knowledge is power, J.D. Power and Associates operates on the principle that information is money. J.D. Power collects information regarding consumers' likes, dislikes, habits and tastes regarding the selection, purchase and satisfaction with a given product, then packages this valuable information and sells it to the producers of the product.

Companies pay J.D. Power upward of $100,000 for this valuable data in order to better gain an edge over the competition, because the competition is paying for this data as well. The survey results help manufacturers design and sell products that consumers want and shows them how consumers feel about products already on the market.

Surveys are conducted through telephone, mail and e-mail. This isn't a random approach to collecting opinions -- survey responders must be familiar with the product being surveyed. This is a very important facet of J.D. Power's offering to businesses. Nobody wants to pay for peoples' opinions about products they don't own or use. The company identifies polling groups largely through demographic research and purchased mailing or customer lists, and then selects random consumers to survey.

Surveys include questions about a wide range of topics, like ease of use, customer service and satisfaction with various features. However, some topics are weighted more heavily during analysis than others. For instance, a high safety score nudges a company's ratings higher than a high score for billing practices. J.D. Power and Associates then performs a statistical analysis of the information gathered and offers this to companies that are affected by the findings.

The company produces reports that compare products using different means of comparison, depending on the industry. One common comparison is "problems per 100 (products sold)." The ratings serve to contrast companies based on the best and worst performers. Since one company will always be tops over the others, there is never a report that lacks a top-rated company or product -- there will always be a winner and a loser in every category.

Next, we'll look at some of the industries and products that J.D. Power rates.

J.D. Power and Associates earned its reputation for consumer research in the auto industry, but the company has expanded its polling to include many different industries. While many of these efforts have generated lots of business, it has also left the company open to complaints that it's operating outside its field of expertise: automobiles. While J.D. Power does offer consulting services to industries it serves, its primary offering is its access to the "voice of the people," and no industry can easily dismiss the opinions of the market it serves.

Not every industry is a good fit for J.D. Power & Associates. There is concern over watering down the integrity the company has attempted to build since its inception, so it won't be providing hula hoop market research any time soon. There are certain industry prerequisites that must be satisfied to make consumer research financially viable. The product itself must be a fairly significant purchase for consumers to have strong opinions about it (and for the manufacturers themselves to care). This cancels out products like toothpaste, shampoo and bubble gum. An industry must also be full of competitors, or else there won't be enough companies available or motivated enough to purchase the consumer research.

J.D. Power conducts surveys for the following industries:

Dave Power learned early on that publicizing the general results of his company's surveys would raise consumer awareness, reward companies for high performance, spur sales of the complete data set within a given industry and push companies to improve products and services.

Though in-depth data is collected from consumers, a highly summarized version of it is produced for release to the media. The summary names the best products in a chosen category. This recognition means a lot to a company's marketing department, and a "win" is usually highly touted. However, early on there was a problem with companies playing fast and loose with the categories and results when trumpeting achievements in the surveys. J.D. Power now fiercely protects the advertising of its ratings, and companies must pay a licensing fee to do so. Additionally, ads must be pre-approved by J.D. Power, and the categories that can be used in advertising pitches are pre-determined each year before the surveys take place. So, a car company that performs poorly overall can't cherry-pick a minor subcategory it performed well in (billing services, for instance) to brag about.

While this generates some money for J.D. Power, the lion's share of the revenue comes from selling the complete data to competitors in the field. They use it to improve their products and services and to better understand what their customers like.

J.D. Power uses "Power Circles" to signify to consumers how a product performed. The circles used are the same as "stars" in other reviews, and five circles is the highest rating. The ratings are entirely comparative, so the circles represent how products compare against similar products in the marketplace. A rating of five circles means a product is the best, or among the best, when compared to others in the survey. A four-circle rating signifies a product is better than most of its competitors, but not the top rated. Earning three stars means you are not the leader of the pack, but rather a member of the pack. No company's marketing department wants to learn a product has been awarded just two circles -- it's the lowest rating, and that judgment comes straight from the people who use your product.

To differentiate between the very top performers in a category, J.D. Power assigns an "award" to the very best in class, along with five circles. Other products that are rated in the top 10 percent just receive five circles.

Want to learn more about the auto industry and how it works? See the links on the next page to more HowStuffWorks articles.