Many of the startups I mentor are so early stage they don’t even have customers – but for those who do and those who will, consider the Net Promoter Score (NPS). It seems the bigger the company the popular NPS is: Best Buy, Delta, American Express, Intuit, United Health, IBM …
The title of The Wall Street Journal article by Khadeeja Safdar and Inti Pacheco The Dubious Management Fad Sweeping Corporate America is misleading, as are many headlines in our click-bait culture. The sub-title is somewhat more accurate: NPS—or net promoter score—is a measure of customer satisfaction that has developed a cultlike following among CEOs. It also may be misleading. The authors actually do a good job of presenting both the pros and cons of NPS, but balance doesn’t generate clicks.
The beauty of NPS to me is its simplicity. It consists of a single question for customers:
On a scale of 0 to 10, how likely are you to recommend the company’s product or service to a friend? The survey usually includes a follow-up question asking customers to explain their ratings.
NPS is based on the premise that every company’s customers can be divided into three groups. People who answer 9 or 10 are “promoters,” or loyal enthusiasts who keep buying. Those who give a score of 0 to 6 are “detractors,” or unhappy customers. Those who answer 7 or 8 are considered “passives,” satisfied but easily wooed by competitors.
However, recent surveys show no correlation between NPS with revenue nor predict customer behavior better than any other survey-based metric. Several unquoted companies maintain that NPS does in fact correlate with revenue growth. Though the fact that these NPS users decline to be quoted speaks for itself.
There are two technical reasons why NPS might not always correlate with profit or other measures of corporate success. One is that the score is derived by subtracting the percentage of customers who are detractors from those who are promoters, which increases the unreliability of the survey by conflating two variables, each of which has an error rate. Secondly, research has been criticized as focusing on too small a sample The latter may well be a red light for startups whose customer numbers are a rounding error for the large companies mentioned in the WSJ article.
One criticism of NPS seems valid to me: that organizations tend to concentrate far too much on their NPS score and not enough on applying insights from the survey to improve their customers’ experience.
So what’s a founder to do? First I would not bother with NPS until your customers hit four figures. Given the low response rate to surveys in general you need a large customer set to ensure that you get enough responses to be valid. Secondly, you need to install other measures of customer satisfaction so you are not wholly dependent on NPS. For ecommerce retailers such measures may include rate of returned merchandise and number of complaints handled by customer service. For subscription services, churn is probably the most important metric. You can start by reading the post Identifying What to Watch: 14 Key Performance Indicators That Matter and instantiating some of these metrics. You can then develop a scorecard that includes NPS but also other measures. This scorecard needs to be filled out regularly – perhaps monthly for early stage companies and quarterly for latter stage ventures. Founders need to resist the impulse to tinker with NPS or your metrics, as it is important to have baseline data and be able to measure projected versus actuals over time.
Mentorphile 