Re-Evaluating The Net Promoter Score

 
Fred Reichheld, an American loyalty guru, has argued that the
days of customer satisfaction surveys are over (Reichheld,
2003). Instead we should only be measuring customer loyalty.
According to Reichheld all that is necessary is a single
question, which he labels ‘The Ultimate Question’.

The Ultimate Question is simply “How likely are you to recommend
company X to friends and colleagues?” Respondents are asked to
rate the likelihood of recommending on a scale from 0, meaning
extremely unlikely, to 10 meaning very likely. Promoters are
those who give a rating of 9 or 10. Promoters are important not
only because they are more likely to promote your brand to
friends and family, they also tend to spend more than
non-Promoters (Reichheld, 2003).

According to Reichheld you need to take it a step further if you
want to relate the rating to future corporate growth, by
calculating a Net Promoter Score. The Net Promoter Score is
simply the percentage of respondents who give your brand a 9 or
10 rating on a 0 to 10 recommendation scale, minus the
percentage who give you a rating of 0 to 6 on the scale
(Reichheld, 2003).

Popularity

On the back of Reichheld’s finding that the Net Promoter Score
correlates with future corporate growth across a number of
sectors (Satmetrix, 2004), the measure has gained broad support
from executives across a variety of industries. Some, such as
GE’s CEO Jef Immelt, have taken the unusual step of publicly
praising the approach (General Electric, 2005).

Besides the claimed relationship with corporate growth and
customer behaviour, an additional attraction is simplicity,
something very appealing to time pressured executives.

Along the way Reichheld has popularized various ideas in tandem
with the loyalty measure – such as his controversial claim that
retaining 5% more customers equals 100% more profits. Of
particular concern to those who have invested heavily in
customer satisfaction measurement, is the claim that customer
satisfaction measurement is redundant.

Reichheld pitches satisfaction measurement against loyalty
measurement and proclaims the death of satisfaction measurement.
He claims that customer satisfaction measures are overly
complicated, a heresy to some in the boardroom, and that they
also fail to explain corporate growth differences in a sector.

He also laments the long windedness of the questionnaires
typically employed to measure customer satisfaction.

The Ultimate Question?

There is nothing terribly wrong with the Ultimate Question –
other than that it is far from being ‘ultimate’. Reichheld
claims that of the 20 different measures he tested, it was the
best predictor of customer behavior and future corporate growth
(Reichheld, 2003).

Not the Best Predictor of Customer Retention

You don’t need a degree in statistics to figure out that there
is something intuitively wrong with the claim, that whether a
customer says he will recommend your company or not is the best
predictor of whether he will stay with your company.

Differences in the tendency to recommend don’t automatically
mean there will be differences in loyalty behavior – whether
retention or increased spend. Results from an analysis I
conducted using data collected by Ask Afrika, of a number of
different markets ranging from short term insurance to cars made
this clear. Using an approach which has been established as a
reliable predictor of the percentage of customers switching away
from a company, I compared the results to the Net Promoter Score
(this approach is discussed in a related article "The One Number
You Need to Measure Loyalty").

Clearly the Net Promoter Score does not relate to the percentage
of customers switching away from each institution.

A survey of 8000 customers in the banking, retail and ISP
industries, conducted by Keiningham et al. (2007) lends support
to this. Keiningham et al. (2007) asked customers the likelihood
of recommending question along with a rival set of questions,
and then followed up with questions about retention a year
later. The results showed that the Ultimate Question barely
improves on a conventional satisfaction measure as predictor of
retention, and was outperformed by a simple repeat purchase
intention question.

Doesn’t Identify Those Who Are Truly Loyal

Reichheld (2003) states that some clients buy out of habit,
which means that retention measurement (i.e. did they stay or
did they go) is not a good measure of true loyalty. He suggests
that the Net Promoter approach is able to identify true loyalty.
This suggests that Net Promoters should be more resistant to
competing offers than those who just buy out of ‘habit’.

However, using cell phone data collected by Ask Afrika, I found
hidden differences amongst consumers who were identified as
‘Promoters’. Far from being uniformly loyal, some were far more
prone to being tempted by competitor offers than others. The key
difference was the customer’s level of involvement with cell
phones.

I found that amongst the Promoters who were psychologically
involved with cell phones, competitors offering 20% discounts
would create a smaller increase in the switch rate than amongst
those Promoters who were not involved. Intriguingly those who
were involved, although being an asset in that they were more
resistant, spent less on their cell phones every month than
those who were involved.

In essence, ‘Promoters’ are not equally loyal.

Relationship With Growth Not Clear

One of the foundational claims which undergirds the value of the
Net Promoter Score, is the claim that the Net Promoter Score
relates to corporate growth. However this is questionable. In a
study of 80 companies over a 7 year period, the researchers
Morgan & Rego (2006) found that the Net Promoter Score was not
predictive of company growth rates. In fact, customer
satisfaction outperformed the Net Promoter Score as a predictor.


Weighing-up the Positives and Negatives of the Net Promoter
Score

Reichheld has brought up some valid points about satisfaction
and loyalty measurement. Simplicity is not only appealing to
high-level decision makers, it also appeals to customers who
don’t want to answer long questionnaires. The measure also lends
itself to standardization, to the point where it may be a useful
number to include on the balance sheet.

That is one side of the story. The other is that the ‘Ultimate
Question’ is far from being the most accurate measure of
loyalty, and so will more often mislead than help.

It can also prove frustrating when it comes time to understand
how to resolve a loyalty problem. Perhaps the highest-level
decision makers are not overly concerned about tactical level
problem solving, however someone in the company will have to be;
and a single question won’t give the answers needed.

Another issue is the delay before loyalty changes. If executives
wait until loyalty has been affected, it is sometimes too late.
Satisfaction with service quality will often drop long before it
affects loyalty.

So Where to Now?

Reichheld has confused satisfaction with loyalty. Satisfaction
and loyalty are two different issues. While you would naturally
expect loyalty measures to relate more closely to customer
behaviour and future growth than satisfaction and service
quality perceptions, claiming that you should drop these
measures in favour of loyalty measurement makes no sense at all.


Customer satisfaction with the service quality delivered, is
only one amongst a number of loyalty drivers, but that doesn’t
mean it should be ignored.

Measuring loyalty alone, may tell you how many loyal customers
there are, but it doesn’t tell you how to fix the problem if
there is one.

It is still necessary to measure customer satisfaction, along
with service quality perceptions in order to flag issues and
tackle the root causes of loyalty failures. Throwing out
satisfaction in favor of loyalty is like deciding that you only
need to report net profits on an income statement and can
dispense with all the rest of it.

Lastly, looking beyond the hype, it is clear that willingness to
recommend is a sub-optimal loyalty measure. There are far more
accurate loyalty measures in existence which have benefited from
years of development by professional marketing researchers. They
offer better accuracy in predicting loyalty behaviors, and are
typically coupled with diagnostics which aid in gaining an
understanding of what creates loyalty.

Copyright reserved (2007). The author gives permission for the
article to be re-published, however the article may not be
altered or shortened and must be re-published in its entirety.

References:

General Electric, (2005), “GE annual outlook meeting – final”,
Fair Disclosure Wire (Quarterly Earnings Reports), Dec 13.

Keiningham, T.L., Cooil, B., Aksoy, L., Andreassen, T.W.,
Weiner, J.W., (2007)“The value of different customer
satisfaction and loyalty metrics in predicting customer
retention, recommendation, and share-of-wallet”, Managing
Service Quality Vol. 17 No. 4, 2007 pp. 361-384.

Morgan, N. & Rego, L. (2006) “The value of different customer
satisfaction and loyalty metrics in predicting business
performance”, Marketing Science, September/ October.

Reichheld, FF., (2003), The one number you need to grow, Harvard
Business Review, December, Vol. 81, Issue 12.

Satmetrix, (2004), The power behind a single number: Growing
your business with Net Promoter, Satmetrix Systems.

*Note: Net Promoter is a registered trademark of Satmetrix
Systems, Inc., Bain & Company and Fred Reichheld.

About the Author: Craig F. Kolb is a marketing research
specialist who has authored a number of papers and articles in
the areas of customer satisfaction, loyalty and brand equity. He
is currently responsible for product research and development at
marketing research firm, Ask Afrika in South Africa.
http://www.askafrika.co.za

Source:

Permanent Link: