Douglas Holmes

Douglas Holmes header image 2

Why NPS is great even though it doesn’t work

February 24th, 2011 · No Comments · Articles

Last month I was lucky enough to hear a talk given by Simon Lyons, the director of Marketing & Communications at Aggreko plc. at the Prince’s Scottish Youth Business Trust (PSYBT) Elevator networking event.

Simon had one piece of advice for the roomful of young entrepreneurs eager to grow their businesses: listen to your current customers. It may not be a new idea, but his method for tracking customers’ opinions was novel to many of the people in the room. Simon recommends using something called “NPS” or Net Promoter Score.

What is it?
The Net Promotor Score is an indicator of how loyal your customers are, and can be worked out easily from one simple question.

Ask your customers “Would you recommend [my company] to a friend or colleague?”, giving them a scale from 0 (definitely not) to 10 (very definitely).

Then you can categorise respondents as follows:

0-6: Detractors – unhappy customers
7-8: Passives – satisfied but unenthusiastic customers
9-10: Promoters – evangelists for your company

Subtract the percentage of “Detractors” you have from the percentage of “Promoters”, and you have your NPS. This score can thus range from -100 (meaning all your customers would actively dissuade others from using your company) to +100 (meaning all your customers would strongly recommend using your company).

What is it supposed to do?
Enthusiasts see the NPS as a reliable indicator of future growth.

As the Net Promoter website points out, there are problems with using current sales to indicate future performance. Conventional accounting doesn’t take into account the difference between “Good profits” and “Bad profits”.

The idea behind this distinction is that “Good profits” (those generated by making the customer happy) lead to future growth because customers will continue to buy from them, and promote the company to their associates, leading to referral sales. “Bad profits” (those generated by cutting back services or the abuse of market power) will ultimately lead to a reduction in future sales, as the customers who are being exploited will change suppliers as soon as they can, and actively recommend against using the company to the people they know.

By measuring their Net Promoter Score, managers theoretically gain insight into customers’ reactions to changes they are making. This can help them decide whether to backtrack or push forward. For more information about the way NPS can be incorporated into the way a business is run, see Net Promoter Operating Model.

Criticism
Since Fred Reichheld unveiled the Net Promoter Score in “The One Number You Need to Grow”, the idea has been a magnet for controversy.

Perhaps the most heavyweight opponent is Tim Keiningham, Global Chief Strategy Officer and EVP at IPSOS Loyalty, one of the world’s largest market research firms.

Keiningham says the primary reason why NPS has become so popular is that it was backed up by extensive scientific research suggesting that NPS was always the best indicator of future firm growth.

However, Keiningham et al’s own research found otherwise. It showed that the “recommend intention” was not universally the best single predictor of future growth, and more sophisticated indicators which take multiple variables into account out-performed NPS without exception.

For more detail about these criticisms, see Keiningham’s interview with Admap

Why these criticisms don’t matter
Fair enough, some of the claims for NPS verge on the bombastic. NPS may well not be the best indicator of future loyalty. However, getting into the habit of asking customers what they think and responding to that feedback is extremely important. The complications of setting up traditional surveys puts some businesses off the whole process, and certainly makes it more difficult to rally employees to improve service.  NPS is not the “The Only Number You Need to Grow”, and “Would you recommend [my company] to a friend or colleague?” might not even be the best single question you can ask your customers, but it seems like a good start.

What do you think?
Is this a fair assessment of the Net Promoter Score?

Do you think your business should use Net Promoter Score?

If not NPS, what customer satisfaction metrics does your business use (if any), and how is that data  incorporated into the decision making process?

Net Promoter, Net Promoter Score and NPS are registered trademarks of Bain & Company, Inc., Satmetrix Systems, Inc., and Fred Reichheld.

Tags: ·

No Comments so far ↓

There are no comments yet...Kick things off by filling out the form below.

Leave a Comment