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

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Net Promoter is a customer loyalty metric co-founded by (and a registered trademark of) Frederick F. Reichheld, Bain & Company and Satmetrix. It was introduced by Reichheld in his 2003 Harvard Business Review article "The One Number You Need to Grow."[1] The most important proposed benefits of this methodology derive from simplifying and communicating the objective of creating more "Promoters" and fewer "Detractors" -- a concept claimed to be far simpler for employees to understand and act on than more complicated, obscure or hard-to-understand satisfaction metrics or indices. In addition, proponents claim the Net Promoter methodology can reduce the complexity of implementation and analysis frequently associated with measures of customer satisfaction, providing a stable measure of business performance that can be compared across business units and even across industries, and increasing interpretability of changes in customer satisfaction trends over time.

Companies obtain their Net Promoter Score by asking customers a single question on a 0 to 10 rating scale: "How likely is it that you would recommend our company to a friend or colleague?". Based on their responses, customers can be categorized into one of three groups: Promoters (9-10 rating), Passives (7-8 rating), and Detractors (0-6 rating). The percentage of Detractors is then subtracted from the percentage of Promoters to obtain a Net Promoter score. A score of 75% or above is considered quite high. Companies are encouraged to follow this question with an open-ended request for elaboration, soliciting the reasons for a customer's rating of that company or product. These reasons can then be provided to front-line employees and management teams for follow-up action.[2]

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 Net Promoter Score correlates with revenue growth. Discussed at length in The Ultimate Question: Driving Good Profits and True Growth written by loyalty business model expert Fred Reichheld of Bain & Company, and "Answering the Ultimate Question" by Richard Owen and Laura Brooks, the Net-Promoter approach has been adopted by a large number of large companies, including Philips, GE[3], Allianz[4], P&G[5], Intuit[6], American Express, [7] and Westpac Banking Corporation.

[edit] Criticism of NPS

Despite its popularity among business executives, the Net Promoter concept is controversial in academic and market research circles. Research co-authored by loyalty consulting competitor IPSOS Loyalty disputes the claims of Reichheld concerning Net Promoter.[8] Furthermore, Hayes (2008) found no scientific evidence that the "likelihood to recommend" question is a better predictor of business growth compared to other customer loyalty questions (e.g., overall satisfaction, likelihood to purchase again). Specifically, Hayes found that the "likelihood to recommend" question, does not measure anything different than other conventional loyalty-related questions. [9]

Environmental factors may exert an influence on customers' response to the "recommend" question -- making comparisons across business units or industries difficult in certain cases. Examples include comparing businesses with an associated social stigma (e.g., cigarettes or online dating) and businesses with different levels of service fulfillment (e.g., delivery services as compared to gyms). Moreover, determining when the survey should be delivered may be more obvious in some cases than in others (such as in the case of a gym), where customer attitudes may be likely to change over time.

Daniel Schneider, Jon Krosnick, et al found that out of four scales tested, the 11-point scale advocated by Reicheld had the lowest predictive validity of the scales tested.[10] Others have taken issue with the calculation methodology, claiming that by collapsing an 11-point scale to three components (e.g., Promoters, Passives, Detractors), significant information is lost and statistical variability of the result increases.[7] The validity of NPS scale cut-off points across industries and cultures has also been questioned.[11]

On the other hand, other independent research confirms the fundamental claim of a relationship between relative competitive Net Promoter Scores and competitive growth rates.[12] Similarly, research in Australia by Mark Ritson also supports the conclusions.[13] Proponents of the Net Promoter approach point out that the statistical analyses presented prove only that the "recommend" question is similar in predictive power to other metrics, but fail to address the practical benefits of the approach, which are at the heart of the argument Reichheld puts forth.

Proponents of the approach also 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.[7]

[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[13], claims a positive correlation between NPS and growth of the company.[15] 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[16]. Procter and Gamble uses Net Promoter Scores to measure the health of its brands.[5] Allianz uses Net Promoter Scores to help it achieve what it calls "customer-centricity".[4] Other companies using NPS include American Express,Concentra Medical Centers, BearingPoint, The Carphone Warehouse and Intuit.[17] Verizon Wireless also uses NPS in all business channels including their call centers and retail stores.[18]

[edit] References

  1. ^ Frederick F. Reichheld (December 2003). "The One Number You Need to Grow". Harvard Business Review. http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=R0312C&referral=2340. 
  2. ^ "The One Number You Need to Grow: Key Ideas From the Harvard Business Review Article by Frederick F. Reichheld," HBR In Brief, retrieved 12/16/2008
  3. ^ ucY4hqA&pagewanted=print "With Its Stock Still Lackluster, G.E. Confronts the Curse of the Conglomerate," New York Times, August 16, 2006
  4. ^ a b Allianz Capital Markets Day presentation, July 13, 2006
  5. ^ a b P&G Investor Day presentation, December 16, 2006
  6. ^ Intuit Success Story
  7. ^ a b c "Would You Recommend Us?" Business Week, January 30, 2006.
  8. ^ Timothy L. Keiningham; Bruce Cooil (July 2007). "A Longitudinal Examination of Net Promoter and Firm Revenue Growth". Journal of Marketing 71 (3): 39-51. http://www.atypon-link.com/AMA/doi/pdf/10.1509/jmkg.71.3.39. 
  9. ^ Hayes (2008), "The True Test of Loyalty," Quality Progress, June 2008, 20-26.
  10. ^ Schneider, Daniel; Berent, Matt; Thomas, Randall; Krosnick, Jon (2007): "Measuring Customer Satisfaction and Loyalty: Improving the 'Net-Promoter' Score"; paper presented at the Annual Conference of the World Association for Public Opinion Research (WAPOR); Berlin (Germany)
  11. ^ "Customer advocacy metrics: the NPS theory in practice" Admap, February, 2008.
  12. ^ Advocacy Drives Growth: Customer Advocacy Drives UK Business Growth, September 5, 2005
  13. ^ a b "Net Promoter Scores Australia 2006," Melbourne Business School
  14. ^ "Would You Recommend Us? That simple query to customers is shaking up planning and executive pay," Business Week, January 30, 2006
  15. ^ "The One Number You Need to Grow," Harvard Business Review, December 2003
  16. ^ GE Letter to Stakeholders, 2005 Annual Report
  17. ^ Business Week article, January 30, 2006
  18. ^ 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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