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Net Promoter: can a magic number really guide your business?

17th Aug 2007
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Neil Davey of MyCustomer.com investigates the concept of Net Promoter scores - seen by some as the holy grail of corporate performance measurements.

magic numbersIt is a quest akin to the search for the holy grail - the hunt for a magic number in business that is inextricably linked to financial results and actions.

Yet unlike the quest for the grail (and I'm discounting the fictional successes of Dan Brown's protagonists and King Arthur here), the search for a magic number appeared to have reached a successful conclusion. In 2003, a Harvard Business Review article - 'The one number you need to grow' - introduced the world to Net Promoter. Based around the idea that word of mouth is the key metric, rather than the likes of customer satisfaction or customer retention, Net Promoter claimed to provide a score that would accurately predict a company's ability to grow.

This metric, the Net Promoter Score (NPS), was even easily derived: survey consumers on the likelihood (out of 10) that they would recommend the company, and subtract the proportion of respondents who rate the company at 6 or less - 'detractors' - from the proportion who rate the company at 9 or 10 - 'promoters' - and the result is your NPS. Developed by influential loyalty business model expert Frederick Reichheld, who changed the landscape of loyalty in the 1990s, the research data seemed to leave NPS' clear superiority over other measures in no doubt. Hailed by Reichheld as the "single most reliable indicator" of company growth, NPS was embraced wholeheartedly by the management community. The quest, it appeared, was over.

But there are those that have their doubts. In fact, there is increasing debate over whether Net Promoter is the success it has been portrayed as. Some are questioning whether it is the superior 'magic number' after all, or just another useful metric. And, more importantly, some are suggesting that no magic number exists at all. Just what is going on?

A shock in store
Timothy Keiningham is senior vice president and head of consulting at IPSOS Loyalty. Along with a team of loyalty experts - Lerzan Aksoy (Koc University), Bruce Cooil (Vanderbilt University), and Tor Wallin Andreassen (Norwegian School of Management) - Keiningham recently set out to re-examine Reichheld's research and findings on NPS.

Using industries cited as exemplars of the NPS metric, and longitudinal data from 21 companies and 15,500 interviews, it was assumed that the findings would replicate those of Reichheld in 2003 and Satmetrix in 2004. But there was a shock in store. Not only did they not replicate the findings, but when comparing the results to the American Customer Satisfaction Index (ACSI), Keiningham and his team also found that Net Promoter had no clear superiority to other measures.
 

photo of Timothy Keiningham"Managers were tired of having complex metrics come back that they didn't understand and didn't help them predict. Net Promoter was intuitive and seemed to be vetted." Timothy Keiningham, senior vice president and head of consulting, IPSOS Loyalty

The results came as little surprise to Keiningham. "It is fairly simple to see whether it really works or not," he explains. There have been magazine articles that have shown Net Promoter Scores changing in some ridiculous fashion for companies like Microsoft. You are supposed to double in growth rate every 12 or 13 point increase in Net Promoter. Did Microsoft's fortunes really change that dramatically? It doesn't take a rocket scientist to see where the failings are."

Nevertheless, Keiningham understands management's rush to embrace Net Promoter. "CEOs hunger for something that will help them guide their businesses. But the management sciences have made loyalty too complex to actually be explained. Managers were tired of having complex metrics that they didn't understand and didn't help them predict. Net Promoter was intuitive and seemed to be vetted."

Motorcycle ashtrays
Keiningham is just one of an increasing number of figures casting doubt on the superiority of NPS. Indeed, entire conferences are now springing up devoted to the topic. Another expert who has had similar reservations about Net Promoter is Robert Shaw, visiting professor at the Faculty of Management at the Cass Business School City of London University, who has been a consultant on financial performance of marketing to over 100 companies including the likes of BP and IBM.

"Net Promoter puts the idea of word of mouth promotion centre stage, but people are so uninterested in the majority of products and services that by and large they never talk to other people about them," he suggests. "If you read extensive research literature, you will find that it is really only sex, politics and religion that people talk very actively about. And in that realm, if you are a football club or a religious group then you may well be interested in Net Promoter, and in those rare instances it may have something to say. But for the majority of mundane products and services, it is about as useful as an ashtray on a motorcycle."

 

Robert Shaw"For the majority of mundane products and services, Net Promoter is about as useful as an ashtray on a motorcycle." Professor Robert Shaw

Shaw is similarly dismissive of other metrics and magic numbers that companies rely on to guide their business, whether retention/churn figures, customer satisfaction, market share or number of complaints.

"Companies are looking for magic numbers because there has been a great deal of dissatisfaction about CRM, which has probably been the most heavy investment that companies have made in this area," Shaw says. "Huge amounts of money was spent on CRM technology and people have seen very little payback. Senior executives are questioning whether investment in this area is worthwhile and therefore there has definitely been a search for something that will link financial results to things to do with customers."

And there is concern for the welfare of companies that base their entire strategies on such metrics. Firms that rely on such figures to determine where to allocate their resources best could find themselves being led a merry dance. And it is a particularly dangerous game for the business leaders desperate for a solution. "They are magic numbers - you don't really know how to change that number and when you do suddenly get the number to go up or down and it doesn't have a corresponding impact on business results then you are going to lose all credibility," continues Keiningham.

Leading themselves astray
So what should businesses be putting their weight behind? Unfortunately there is little consensus on this from Keiningham and Shaw. "If I was to take an extreme position, I would say chop out all the metrics that really aren't throwing any light on your revenue patterns. Don't spend money on them. Certainly don't spend management time agonising over them. But instead divert your time and resource to trying to get to grips with what is driving your revenue patterns," Shaw says.

 

"Until companies start acting like good marketers they're always going to lead themselves astray with a single number approach." Timothy Keiningham, senior vice president and head of consulting, IPSOS Loyalty

"The starting point for any company has to be to pull apart its revenue streams. That was a lesson that was learnt amongst the better direct marketers back in the 1980s. What is odd is that when CRM came along in the 1990s, these lessons were forgotten and people simply jumped on the technology bandwagon with the result that the really important stuff - analysing profitable revenue streams - got sidetracked. Unless companies can get to grips with what drives revenue then staring at Net Promoter or various forms of customer satisfaction scores really won't tell you very much."

Keiningham has other thoughts. "Revenue isn't a great predictor of profitability because your highest revenue customers tend to be either your most profitable or your least profitable customers. They can demand more from you or they are so price sensitive that when you make a pricing mistake they buy lots in."

"There is one single number concept the CEO can use - they can ask themselves what percentage of their customers are really loyal and profitable. If they know that, then all they have to know is this same percentage next year, because if it is rising then their profitability is going up by improving loyalty. It is not magic, it is a simple dashboard number that gives the CEO a quick look at whether his loyalty is improving his profitability and whether he is increasing his profitable loyal customer segment - which is what we would all hope for."

Nevertheless, Keiningham dismisses the quest for the magic number. "Even the best ideas aren't universal. If they were, everybody would do them and they would already be known," he concludes. "You need to know what is the number one demonstration of loyalty from your customers, then model back from that - what causes that to happen and what causes that to break? And once you start thinking about it that way, you realise there isn't going to be a magic number because this is driven by different things depending on what industry you are in.

"Companies don't really identify what it is that makes somebody want to buy a product from them, and what it is that enhances the relationship with one customer segment versus another. Businesses apply loyalty in a homogenous way. And until they start acting like good marketers they're always going to lead themselves astray with a single number approach."

Neil Davey is editor of AccountingWEB's sister site, MyCustomer.com.

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