Is a net promoter score a valid predictor of customer loyalty?
Monday, July 16, 2018/
In your business travels you may have heard of the acronym NPS. It stands for net promoter score.
Developed by Fred Reichheld of Bain & Company and Satmetrix in 2003, net promoter score is a management tool designed to gauge the loyalty of a firm’s customer relationships. It serves as an alternative to traditional customer satisfaction research and claims to be correlated with revenue growth. In short, it is a single-question measure that asks customers to rate their intention of referring a business on to others. The rating scale is zero to ten.
Clients who give scores of 9/10 or 10/10 are regarded as being ‘promoters’, while clients who give scores between zero to six are regarded as being ‘detractors’. Forget about seven to 8/10 – apparently they are ‘passives’ and don’t matter as much.
To get an overall NPS for your company or division or department it works something like this.
Your business looks at each net promoter score you get over a period of time and then subtracts the total detractor scores from the promoter scores. The overall NPS scale ranges from -100NPS to +100NPS. You are, of course, wanting a positive score. Anything over zero is moving in the right direction in terms of customers referring you on to others. Anything in the negative zone is problematic.
For instance, according to current NPS data, one of Australia’s largest energy companies currently has an NPS of -30, with the industry hovering around -15 to -20. But you probably didn’t need an NPS to tell you about the current consumer sentiment towards energy companies, affordability and service.
The NPS is an interesting concept that has been all the rage for some time now, especially with larger businesses, which, according to management consulting guru Zeitgeist, ‘live and die’ by their NPS.
However, knowing your NPS is one thing. Doing something meaningful about it is another.
How valid is the net promoter score?
Researchers and other assessment developers have concerns about the NPS because it uses scales with low* predictive validity, meaning it doesn’t really measure causal connections to customer loyalty. (*In general, validity refers to how well a test or assessment actually measures what it intends to measure. Conversely, a weak correlation between the assessment data and the target behaviour indicates low levels of predictive validity.)
In market and behavioural research, a single-item question is much less reliable and more volatile than a composite index.
In 2008, one researcher, Hayes, claimed there was no scientific evidence that the ‘likelihood-to-recommend’ question is a better predictor of business growth than other customer-loyalty questions (e.g. overall satisfaction, likelihood to purchase again). Specifically, Hayes stated that the ‘likelihood-to-recommend’ question does not measure anything different from other conventional loyalty-related questions.
I look at the ‘likelihood-to-recommend’ question like this: even if I am ‘likely to recommend’, the question is ‘will I recommend?’; will I do something with this positive sentiment or am I just answering a question posed to me?
Whatever you make of the NPS, one thing is for sure: it raises the awareness of people to examine if their business, their sales approach, their service levels and delivery of what they promise is ‘recommendable’ at all.
Start by asking yourself: Would you recommend your business to others? If so, why? If not, why not?
Regardless of whether you use NPS or not, being recommended is powerful and referrals are a great source of new business opportunities we cannot do without. To give people a more decisive way to recommend I would set up a referral system that shows people how to refer business your way. Make it easy and clean.
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