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Net Promoter Score: What Is It and Should Your Company Be Using It?

By Michelle Auda, Project Manager

Can one simple question determine your company’s future?

You may have heard the buzz about Net Promoter Score (NPS), a relatively new formula for measuring customer satisfaction by asking just one question. Living in an era where ease and expediency is king, it’s not surprising that companies large and small are attracted to integrating this metric into their research programs.

What Is It?

Co-developed by Bain & Company loyalty expert Fred Reichheld and Dr. Laura Brooks of Satmetrix Systems, NPS was introduced to the masses in the Harvard Business Review article, “The One Number You Need to Grow” (December 2003). After asking a variety of satisfaction-related questions and comparing results with respondents’ subsequent repurchase and referral behavior, Reichheld and Brooks’ research concluded that the question that best predicted behavior was, How likely is it that you would recommend Company X to a friend or colleague?

The metric works like this: customers answer the question on a zero-to-ten scale, 9’s and 10’s are classified as “promoters,” 7’s and 8’s as “passives,” and 6’s and below as “detractors”. To calculate the score, you simply subtract the percentage of detractors from the percentage of promoters. (Figure 1.1)

“Promoters are customers who are so enthusiastic about a firm or brand that they not only increase their own purchases, but also refer their colleagues or friends. Passives are satisfied but unenthusiastic customers who can be easily wooed by the competition. Detractors are customers who feel so badly treated that they cut back on purchases, switch to the competition, and warn others to stay away from the company.” (netpromoter.com)

Figure 1.1

Good Profit vs. Bad Profits

The NPS concept aims at turning a company’s bad profits into good profits. And what exactly are bad profits? Reichheld defines bad profits as “profits earned at the expense of customer relationships.” Basically, the profit is made, but the customer becomes a detractor.

An example of a company generating bad profits would be a hospital not revealing the deals they have with insurance companies, or an airline charging $100 to change a ticket. The idea is that bad profits work their damage through the detractors they produce. Reichheld states, “The only way a company can truly live by the Golden Rule -- treat others as you would like to be treated -- is to avoid bad profits entirely.” (Reichheld, The Ultimate Question, Harvard Business School Publishing Corporation, 2006)

Should Your Company Be Using It?

As with any new trend, NPS has generated its own share of promoters and detractors. Major companies like General Electric, Harley-Davidson, and Amazon.com have adopted it while others question the value of the concept. Promoters of the concept find it easy to use and understand while detractors say it’s oversimplified.

GE Healthcare's chief quality officer, Peter McCabe, told Business Week in January that he believes that NPS "Will be as big and long lasting for GE as Six Sigma was." (qualitydigest.com)

A Business Week blogger states: “There is no doubt value in customer feedback, but unless GE's methodology can tell me why customers are calling, what they are calling about, and where my problems exist, I don't see the long-term benefit. … In order to effectively measure customer satisfaction, an organization will need an automated method for trending perception and experience over the course of multiple interactions.”

Critics who felt Reichheld's claims are overstated put them to the test. "When we use his data, net promoter doesn't come out to be the best predictor" of growth, said Tim Keiningham, senior vice president of the Ipsos Loyalty unit of France's Ipsos SA and lead author of a study to be published next year in the Journal of Marketing. (WSJ.com)

Keiningham also states, “Managers must make their own decisions regarding the metrics that they track to help them run their businesses. If the reason for adopting Net Promoter, however, was the analytic research used to support the superiority of the metric, or its reported linkage to firms’ relative growth rates within their respective industries, then it’s time to reassess their approach to managing and reporting on customer loyalty.” (Ipsos Minute, 1/07)

Reichheld does warn that NPS may not be appropriate for every industry. In certain business-to-business settings, a question such as How likely is it that you will continue to purchase products or services from Company X? may be better. Reichheld’s warning illustrates the importance of companies doing their homework and knowing what is appropriate for their business and customers.

Branding expert and Polaris Marketing Research Senior Vice President Debra Semans states, “I see no issue with incorporating the Net Promoter Score into a research program but to rely on one question alone can be risky. Our clients are still interested in answers to more than one question.”

While it may be tempting to adopt this popular approach, companies should be mindful of throwing all their eggs in one basket as the concept does not yet have a proven track record. The idea of putting customers at the heart of one’s business is not new. Net Promoter may just help to provide one more reminder.

 

Michelle Auda is a Project Manager for Polaris Marketing Research. In addition to managing projects and client relationships, she is also responsible for overseeing a team of data specialists for several important customer satisfaction ad hoc and tracking research studies.