The net promoter score is considered useful as a predictor of potential revenue growth, the theory being that customers willing to recommend a firm are loyal, and therefore, repeat buyers. So the higher the net promoter score, the better positioned a firm is supposed to be, in terms of ability to generate a profit.
Bain and Company fellow Fred Reichheld, inventor of the net promoter score, an index of customer willingness to refer a product to others, once famously argued that loyal customers were more profitable.
The argument is that loyal customers generate increasing profits each year they stay with a company, in part because they buy more, and because they impose fewer operating costs. They know how to use a company’s products, have figured out why they use a product and therefore are less likely to have questions about billing and other elements of the product experience.
They also arguably make more referrals to others, which is what the NPS attempts to measure. In many cases, loyal customers might also be willing to pay a premium rather than switch.
“In financial services, for example, a five percent increase in customer retention produces more than a 25 percent increase in profit,” Reichheld argued.
But some question its relevance and predictive power, as popular as NPS is in many firms. “Two 2007 studies analyzing thousands of customer interviews said NPS doesn’t correlate with revenue or predict customer behavior any better than other survey-based metric,” two reporters for the Wall Street Journal report. “A 2015 study examining data on 80,000 customers from hundreds of brands said the score doesn’t explain the way people allocate their money.”
Of all the criticisms, lack of predictive capability might be the most significant, since that is what the NPS purports to do: predict repeat buying behavior.
“The science behind NPS is bad,” says Timothy Keiningham, a marketing professor at St. John’s University in New York, and one of the co-authors of the three studies. “When people change their net promoter score, that has almost no relationship to how they divide their spending,” he said.
Others might argue that social media has changed the way consumers “refer” others to companies and products. Some question the methodology.
As valuable as the “loyalty drives profits” argument might be, it is reasonable to question how well the NPS, or any other metric purporting to demonstrate the causal effect of loyalty or satisfaction on repeat buying, actually can predict such behavior.
For similar reasons, it might be fair to question relevance in some industries that habitually score at the very bottom of U.S. industries on NPS, such as internet service provider business or the cable TV business. Where NPS scores range from zero to 100, cable TV and ISP service ranks in negative numbers, 2019 U.S. NPS scores show.
One issue with the NPS is that some argue customer satisfaction is what is measured, not loyalty. The difference is subtle, but possibly important.
Surveys have shown that even satisfied customers will switch brands. The point of loyalty is that customers show resistance to switching behavior. And some point out that only “complete satisfaction” is highly correlated with loyalty (repeat buying behavior). Merely “satisfied” customers arguably are as fickle as unhappy customers.
Those rankings are congruent with satisfaction surveys published by the ACSI, which show internet access and cable TV at the bottom of all industries ranked, virtually year after year.
Some might argue that the NPS or other measures of satisfaction are more important in highly-competitive industries, while of little use in monopolized businesses. This 1995 chart shows how little customer satisfaction mattered in the telephone business, then a monopoly. Whether very satisfied or completely dissatisfied, buying behavior was not affected. There were no choices.
These days, as the telecom business is significantly competitive, we can argue about the importance of customer satisfaction, to a degree. Possibly nobody would claim customer satisfaction does not matter, as a contributor to customer loyalty (repeat buying). But neither is it completely clear how important satisfaction actually happens to be.
Nor is it possible to divorce the importance of customer targets from the broader satisfaction measures. Any firm has to match its offers with the right audience, not just the right features and value proposition.
Targeting the wrong customers will generally fail, with high rates of churn and customer dissatisfaction. The oft-cited example is chasing price-sensitive customers who will quickly churn off once the discounts end.
Customer satisfaction is not the same as customer loyalty, in other words. But it might still be argued that net promoter scores do matter within an industry, as a way of measuring performance against a firm’s competitors. In other words, it might well matter if Verizon’s service gets higher NPS than Comcast.
Still, little research seems to have been done on circumstances when NPS actually is misleading or irrelevant. Industries that are declining might be an instance where even lower NPS or higher NPS scores do not matter much, as revenues are shrinking inexorably. At the margin, slower rates of decline are better than faster rates of decline, so higher NPS might have some value.
Stil, if demand is declining, ultimately even high NPS does not matter. The market is shrinking, so high recommendations will not fundamentally change revenue prospects.
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