Net promoter score

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The Net PromoterR score is a management tool that can be used to gauge the loyalty of a firm's customer relationships. It serves as an alternative to traditional customer satisfaction research.

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[edit] Overview

Companies obtain their Net Promoter Score by asking customers a single question (usually, "How likely is it that you would recommend us to a friend or colleague?"). Based on their responses, customers can be categorized into one of three groups: Promoters, Passives, and Detractors. In the net promoter framework, Promoters are viewed as valuable assets that drive profitable growth because of their repeat/increased purchases, longevity and referrals, while Detractors are seen as liabilities that destroy profitable growth because of their complaints, reduced purchases/defection and negative word-of-mouth. Companies calculate their Net Promoter Score by subtracting their % Detractors from their % Promoters. Proponents of the Net Promoter approach claim the score can be used to motivate an organization to become more focused on improving products and services for customers. They further claim that a company's relative Net Promoter Score (its score relative to competitors) correlates with revenue growth relative to competitors.

First introduced in a 2003 article in the Harvard Business Review[1], the concept is discussed at length in The Ultimate Question: Driving Good Profits and True Growth written by loyalty business model expert Fred Reichheld of Bain & Company. The Net Promoter approach has been adopted by a large number of large companies, including GE[2], Allianz[3], P&G[4], and American Express.[5]

[edit] Criticism of NPS

Despite its popularity among business executives, the Net Promoter concept is controversial in academic and market research circles. Independent research disputes the claims of Reicheld concerning Net Promoter:[6]

We find no support for the claim that Net Promoter is the ‘single most reliable indicator of a company’s ability to grow.’

Regarding the measurement of customer loyalty, the "likelihood to recommend" question, on which the NPS is based, does not measure anything different than other conventional loyalty-related questions (e.g., overall satisfaction, likelihood to purchase again).[7] This finding suggests that loyalty questions, although appearing to measure very different types of loyalty, actually measure the same underlying construct. There is no scientific evidence that the “likelihood to recommend” question is, or should be, a better predictor of business growth compared to other loyalty questions.[8]

On the other hand, other independent research confirms the fundamental claim of a relationship between relative competitive Net Promoter Scores and competitive growth rates.[9] Similarly, research in Australia by Mark Ritson also supports the conclusions.[10]

Others have taken issue with the calculation methodology, claiming that by collapsing an 11-point scale to three components, significant information is lost and statistical variability of the result increases.[11] The validity of NPS scale cut-off points across industries and cultures has also been questioned.[12]

Proponents of the approach counter that analyses based on third-party data are inferior to analyses conducted by companies on their own customer sets, and that the practical benefits of the approach (short survey, simple concept to communicate) outweigh any statistical inferiority of the approach.[13]

[edit] Industry examples

Because of its emphasis on radical simplicity, the Net Promoter approach is both popular among business leaders and controversial in the market research community.[14]

Research by Fred Reichheld, supported by independent research by Paul Marsden of the London School of Economics and Mark Ritson of Melbourne Business School[15], claims a positive correlation between NPS and growth of the company.[16] General Electric (GE), for example, uses Net Promoter Score to drive process excellence for its customers, and plans to use NPS as a metric to decide the compensation of its leaders[17]. Procter and Gamble uses Net Promoter Scores to measure the health of its brands.[18] Allianz uses Net Promoter Scores to help it achieve what it calls "customer-centricity".[19] Other companies using NPS include American Express, BearingPoint, The Carphone Warehouse and Intuit.[20] Verizon Wireless also uses NPS in all business channels including their call centers and retail stores.[21]

[edit] References

  1. ^ "The One Number You Need to Grow," Harvard Business Review, December 2003
  2. ^ ucY4hqA&pagewanted=print "With Its Stock Still Lackluster, G.E. Confronts the Curse of the Conglomerate," New York Times, August 16, 2006
  3. ^ Allianz Capital Markets Day presentation, July 13, 2006
  4. ^ P&G Investor Day presentation, December 16, 2006
  5. ^ "Would You Recommend Us?" Business Week, January 30, 2006.
  6. ^ Timothy L. Keiningham, Bruce Cooil, Tor Wallin Andreassen, and Lerzan Aksoy (2007), “A Longitudinal Examination of Net Promoter and Firm Revenue Growth,” Journal of Marketing, vol. 71, no. 3 (July), 39-51.
  7. ^ Bob E. Hayes (2007), "Net Promoter Score Debate: The Measurement and Meaning of Customer Loyalty"
  8. ^ Bob E. Hayes (2008), "Beyond the Ultimate Question: Growing your Business through New and Existing Customers"
  9. ^ Advocacy Drives Growth: Customer Advocacy Drives UK Business Growth, September 5, 2005
  10. ^ "Net Promoter Scores Australia 2006," Melbourne Business School
  11. ^ "Would You Recommend Us?" Business Week, January 30, 2006.
  12. ^ "Customer advocacy metrics: the NPS theory in practice" Admap, February, 2008.
  13. ^ "Would You Recommend Us?" Business Week, January 30, 2006.
  14. ^ "Would You Recommend Us? That simple query to customers is shaking up planning and executive pay," Business Week, January 30, 2006
  15. ^ "Net Promoter Scores Australia 2006," Melbourne Business School
  16. ^ "The One Number You Need to Grow," Harvard Business Review, December 2003
  17. ^ GE Letter to Stakeholders, 2005 Annual Report
  18. ^ P&G Investor Day presentation, December 16, 2006
  19. ^ Allianz Capital Markets Day presentation, July 13, 2006
  20. ^ Business Week article, January 30, 2006
  21. ^ Marek, Sue, "On the Hot Seat: Verizon Wireless CEO Lowell McAdam"Fierce Wireless, October 30, 2007, retrieved December 23, 2007.
  • Reichheld, Fred. The Ultimate Question: Driving Good Profits and True Growth, Harvard Business School Press, 2006.
  • Reichheld, Fred. "The One Number You Need to Grow”, Harvard Business Review, December 2003

[edit] See also

[edit] External links

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