13 Aug Is a Net Promoter Score a valid predictor of customer loyalty?
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, NPS 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 0-10.
Clients who give scores of 9/10 or 10/10 are regarded as being ‘Promoters’.
Clients who give scores between 0-6 are regarded as being ‘Detractors’.
Forget about 7-8/10 apparently they don’t matter as much as they are labelled ‘Passives’.
The overall intention of the NPS score is to rate customer loyalty to brand or company. To get an overall NPS for your company or division or department it works something like this:
Your business looks at all the Net Promoter scores 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 0 is moving in the right direction in terms of customers referring you on to others. Anything in the negative zone is deemed problematic.
For instance, according to current NPS score data, one of Australia’s largest energy companies currently has an NPS of minus 30 with the industry hovering around minus 15-20. But you probably didn’t need an NPS score to tell you about the current consumer sentiment towards energy companies, affordability and service.
NPS is an interesting concept that has been all the rage for some time now, especially with larger businesses, who apparently ‘live and die’ by their NPS score ratings according to the management consulting guru Zeitgeist.
Having an NPS score is one thing. Doing something meaningful about it is another.
How valid is the NPS 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 market and behavioural research a single item question is much less reliable and more volatile than a composite index.
Hayes (2008) 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 questions 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 own business to others?’ And if so ‘Why?’ or 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.
My team and I have started working on our own referral system as we speak. I’ll keep you posted.
So, if you found this article useful and interesting, who else do you know who would benefit from reading it, too?