Net Promoter Score and Self-Reports
Net Promoter Score
Example: Zappos uses NPS to see how their customer services are.
When discussing Net Promoter Score, the bigger issue of customer satisfaction comes to mind. The key question here is how to measure customer satisfaction.
To do this, the NPS is used.
Net Promoter Score came about from an article from Frank Reichheld. This was published in HBR. The following graphs show that Net Promoter Score really well captures what's going on in overall customer satisfaction.
Criticism of NPS:
In the above image, we see that for a set of companies, the R2 from ASCI is higher than the R2 from NPS.
Is NPS related with Profitability?
In a way, yes. Net Promoter Score can be related to customer satisfaction, which in fact has been shown many times in past work that it is correlated with profitability. Overall, literature generally suggests that higher customer satisfaction leads to positive outcome for a firm.
What's the problem here?
The link actually might be much weaker than what managers generally think. While the correlations are positive, customer satisfaction only explains a limited part of firm value and firm performance.
Why is that the case?
The common thought is à More satisfied customers are, they'll be more happy to do business with that firm, and hence profitability should be higher. While that is true, it still explains only a limited part.
Why is that?
What would be a way in which satisfaction and profitability might be linked together? If you look at this graph, it shows that the way managers perceive the link between satisfaction and profitability is typically a straight line. So what they intuitively think is that if you keep increasing customer satisfaction, profitability will always keep rising.
However, what people have found, in fact it's much more complicated. There is a positive relationship, but it's not a straight line.
The key point to note here is that the majority of companies are in the flat area. So increasing satisfaction might not make a measurable change in profitability.
Another thing that impacts this is competition.
When we’re doing any kind of survey, we want to think about a few things.
Self-reports
With surveys, the company is reaching out to customers. However, many times customers can reach out to companies by giving self-reports of what they're buying and when they're buying it.
Example: InfoScout is an example of a company that attracts or incentivizes customers to do the following.
Another example is word of mouth dynamics. Here, we would like to know what people are purchasing and what people are talking about. How is our brand being mentioned?
Example: Keller Fay is a company that collects word of mouth dynamics.
- How likely is it that you would recommend a particular brand, your company, to a friend or colleague?
- It's done on a 0 to 10 scale.
- Promoters are people who score a 9 or 10 on this scale.
- Passives are people who score a 7 or 8.
- Detractors are people who score 0 to 6.
- NPS = Percentage of Promoters – Percentage of Detractors
Example: Zappos uses NPS to see how their customer services are.
When discussing Net Promoter Score, the bigger issue of customer satisfaction comes to mind. The key question here is how to measure customer satisfaction.
To do this, the NPS is used.
Net Promoter Score came about from an article from Frank Reichheld. This was published in HBR. The following graphs show that Net Promoter Score really well captures what's going on in overall customer satisfaction.
Criticism of NPS:
- Very similar to ASCI (American Satisfaction Consumer Index)
- For many industries, ASCI index has a higher R2 with industry growth which is higher than NPS
- There is no clear evidence that NPS is superior to other metrics
In the above image, we see that for a set of companies, the R2 from ASCI is higher than the R2 from NPS.
Is NPS related with Profitability?
In a way, yes. Net Promoter Score can be related to customer satisfaction, which in fact has been shown many times in past work that it is correlated with profitability. Overall, literature generally suggests that higher customer satisfaction leads to positive outcome for a firm.
What's the problem here?
The link actually might be much weaker than what managers generally think. While the correlations are positive, customer satisfaction only explains a limited part of firm value and firm performance.
Why is that the case?
The common thought is à More satisfied customers are, they'll be more happy to do business with that firm, and hence profitability should be higher. While that is true, it still explains only a limited part.
Why is that?
What would be a way in which satisfaction and profitability might be linked together? If you look at this graph, it shows that the way managers perceive the link between satisfaction and profitability is typically a straight line. So what they intuitively think is that if you keep increasing customer satisfaction, profitability will always keep rising.
However, what people have found, in fact it's much more complicated. There is a positive relationship, but it's not a straight line.
- If you're at the lower ends, you do see an increase in profitability.
- But many companies might actually be on the flat part of the curve, which is, it's kind of business as usual. Here we see that there is a big flat region where increasing satisfaction, does not actually increase profitability as much.
- When you cross that particular region, then you go to the zone of delight. Much fewer companies, these are people who have amazing customer service, these are the standouts. And for them in their particular category, you would see again that increasing satisfaction does increase profitability.
The key point to note here is that the majority of companies are in the flat area. So increasing satisfaction might not make a measurable change in profitability.
Another thing that impacts this is competition.
When we’re doing any kind of survey, we want to think about a few things.
- What is it capturing?
- How does it compare with other metrics? Does it do better, does it do worse? How exactly what it's capturing is different from what other service could do?
Self-reports
With surveys, the company is reaching out to customers. However, many times customers can reach out to companies by giving self-reports of what they're buying and when they're buying it.
Example: InfoScout is an example of a company that attracts or incentivizes customers to do the following.
- Once they have made their purchases, they take the receipt, they have the mobile device, take a picture of the receipt and send it back.
- InfoScout then collects all of this information across many, many customers, to get insights into when people are buying certain products, where are they buying it, is it at pop stores, is it in convenience stores, is it in big box stores?
Another example is word of mouth dynamics. Here, we would like to know what people are purchasing and what people are talking about. How is our brand being mentioned?
Example: Keller Fay is a company that collects word of mouth dynamics.
- How do they do that? They have panel of customers which basically are given the following task: when you talk to somebody note it down. Who is it? Is it a friend? Is it a colleague? What did you talk about?
- Collecting this data in a diary format over time, across months, they are able to observe what people are talking about, who are they talking to, how is a brand being mentioned, and so on.