7 Metrics for measuring “loyalty” that counts

“Net Promoter Score” can be misleading and dangerous

In order to avoid “death by data”, today’s busy executives are clamoring for simple metrics to provide quick business intelligence.  For example, the Net Promoter Score has been touted as “The One Number You Need to Grow”. While it’s great to simplify through metrics, relying on just a single metric is dangerous, and distracts from managing for loyalty results that really count:  improving the customer experience to increase sales.

Why Net Promoter is a thing of beauty via its simplicity

Net Promoter Score (NPS) is both a methodology and a metric to measure the customer satisfaction.  It was introduced by Fred Reichheld in a Harvard Business Review article:  “The One Number You Need to Grow”.  The sheer beauty and compelling reason why NPS has caught on is the simple methodology of asking customers a 0 to 10 rating scale question:  “How likely is it that you would recommend our company to a friend or colleague?”  Based on the rating score, customers are categorized as:

• Promoters (9-10 rating)
• Passives (7-8 rating)
• Detractors (0-6 rating)

For the overall sample of customers, the percentage of “detractors” is subtracted from the percentage of “promoters” to calculate the “Net Promoter Score”.  A NPS score of 75% or more is considered “high”.  The beauty of the NPS score is the simple, easy low cost methodology, and a metric that is easily understood by marketers, as well as store staff.

 

Why Net Promoter Scores can be variable … unreliable

The NPS score has become extremely popular because it is both simple, and low cost in terms of measuring customer satisfaction.  But, the simplicity of the survey methodology also has some inherent issues related to reliability of scores obtained.  The following are just some of the factors that have an impact on the reliability or consistency of NPS

• The size of the sample of consumers sample
• The mix and the demographics of the sample
• The time of the year when ratings are sampled
• At what point in the process consumers rate their experience
• The nature of the products, services experienced

The reliability refers to consistency of measuring an attribute like customer loyalty or satisfaction.  IF … and it’s a big IF, there is very careful attention to detail and random sampling, it is possible to produce reliable NPS scores with consistency.  Great … so what’s the problem?

Why Net Promoter can be misleading … and dangerous!

While methodology and measurement design might make a metric reliable, it does not mean that it’s “valid”.  It is easiest to illustrate the concept of validity through a simple tangible example.  While it is possible to very accurately measure your weight to within a gram, does a weight metric have any validity as a measure of your height or physical well-being?

NPS can be a simple, reliable metric providing an overall rating of customer satisfaction … at a point in time.  However, the real question is whether the rating of “likelihood to recommend” has any validity for measuring customer satisfaction related to the actual behaviors that produce sales, repeat visits … and ultimately lifetime value and loyalty.   

If NPS becomes the sole focus, the customer rating becomes the “ends”, not the means by which to improve the experience.

The Net Promoter Score it not inherently “bad”.  It becomes extremely dangerous if Net Promoter Scores are viewed as “results”.  I don’t know any manufacturer or retailer that can take NPS scores to their bank.

Key metrics for measuring “true loyalty” results that count

A business’s growth is not ultimately based on a consumer’s propensity to recommend to others … growth is based on consumer’s purchases, size and profitability of market basket, repeat trips and purchases.  IMS refers to this as “The Power of WOW!”

So the question is not to whether to measure NPS, but whether you have a “composite dashboard” that covers the results that count.  “True loyalty” is not a state of mind, but consumer preferences and behaviors which produce measurable loyalty outcomes:

1. Increased trips to store or more site visits
2. Larger volume of sales and/or improved mix
3. Repeat purchases within a period of time
4. Increased size of market basket or AOV
5. Increased profitability of the mix within market basket
6. Increase utilization of services / consumption
7. Increased household sale penetration – “Lifetime Value”

While Net Promoter Score maybe sexy, simple and very low cost …

NPS can be a very misleading and a dangerous metric, if it does not have a very high correlation to the core results outcome metrics of “true loyalty” … earned through superior customer service, experiences, and end user solution satisfaction.

Discover more measurement insights and sound bites by following IMS Results Count on Twitter and Facebook.

Comments

[Javis Lounsbury]

Results from surveys and metrics determines what area a company should fine-tune to ensure that improvements will be continuous at its best, since customers are the lifeblood of many businesses, it is ideal to find ways to make sure that they their loyalty to them will be long-lasting.

[basdeluy]

It's a mistake to focus merely on the metric itself in this kind of discussions. It should be all about the insights you get from asking WHY someone promotes, what it takes to become a future promoter or what causes the criticism. I dont think that the metric itself is so special. You probably get the same answers from any other 5 or 10 or 11 point scale and open ended why-question. But hey if every manager believes the link with the bottomline, thats fine. You go with the NPS (and ofcourse take into account what it takes to get valid results). The ultimate goal should be 'good' profits, just do what it takes!

[Chris Petersen]

Thank your interest and comments on "7 Metrics for measuring loyalty that counts.

I would generally agree with your comment that we are in agreement on "do what matters".

I have no qualms about the utility and use of NPS as one potential indicator of customer satisfaction. It is elegantly simple in design and execution, and low cost.

In short, I think that we agree that NPS is one loyalty metric.

My point about "validity" is that we can NOT always assume that it accurately predicts, especially if the sampling and execution are poorly executed.

Companies need to balance the scorecard with outcome metrics, which in turn enable intra company validation.

Thanks for the dialog ... and useful background information on NPS and how to make it more valuable as a predictor metric.

Chris Petersen

[Adam Ramshaw]

Chris,

I think that we both come down on the same side of life: do what matters. However, it's on that basis that I disagree with you on NPS.

NPS, like almost every other metric can, and is, misused.

Used properly though, the key difference with NPS is that it has been shown to correlate with company revenue. That is, if you increase NPS your revenue will probably go up. If your NPS goes down your revenue growth will probably drop.

It is a loyalty predictor and this feature, combined with its ease of use make it a useful business tool.

For more background on why NPS is really different have a look at this post: http://genroe1to1.genroe.com/2010/01/17/whats-not-wrong-with-net-promoter-score/ .

Adam Ramshaw