Many studies have examined the loyalty effect. Results point at a correlation of 2x revenue growth versus competition for companies with higher customer loyalty. The problem is that loyalty is hard to measure and it is often an after-the-fact type of measurement, therefore it is hard to manage. Customer Satisfaction has been always a lead indicator until analysis showed that 60-80% of defectors rated themselves as “satisfied” or highly satisfied” before they defect.
Research conducted by Bain & Co established one question as a reliable indicator of loyalty as measured by subsequent repurchase behavior and referral rates: “How likely is that you would recommend this company/product/service to a friend or colleague?” On a scale of 0-10 where 9-10 are considered “promoters” and 0-6 are considered “detractors”. This established for benchmarking purposes a formula: NPS=Promoters-Detractors.
The average NPS in the USA is 5-10%, with notable exceptions like Vonage with 49%, Adobe with 46%, AMEX, Southwest over 50% and Apple and Google above 70%, several points above their closest competitors.
A study from McKinsey correlated 2/3 of the economy in the USA being influenced by word-of-mouth (WOM), hence no surprise all the attention given to NPS as this metric measures the hypothetical action of a customer /user.
Research by Satmetrix shows that a 12% increase in NPS correlates to 2x growth in the USA market. My experience over the past four years would show a slightly different picture and I rather look at the link between loyalty-usage-repurchase-referrals.
Your Customer would not recommend you, now what?: A study published by Neil Morgan and Leotto Rego in Marketing Science compared NPS to other metrics and found no advantage for NPS. Timothy Keiningham and his colleagues followed up with a multi-industry test published in the Journal of Marketing and found that indeed NPS was not better than Customer Satisfaction (CS) in predicting growth. I personally experienced this over the last 3-4 years measuring both NPS and CS for the same set of products and services and finding that if instrumented properly, both figures are equally relevant and there is no advantage of one over the other.
Rather than a perfect way to measure loyalty, I see NPS as a catalyst at implementing a Customer Loyalty driven culture at companies and a standard to use for benchmarking and compensation purposes, especially at the C level suite, because when implemented properly it provides companies with actionable data.
The value of NPS or CSat is on establishing a common baseline to measure progress on improving the Customer Experience, and measuring performance against competition. NPS or CSat as isolated indicators, tell us very little, but when combined with “Usage” and “Referrals” metrics, and when the data is aggregated with other customer-voice data points, it provides a comprehensive view and helps to overcome one of the challenges of the NPS, which is moving beyond implementing the measurement system into taking action to improve the Customer Experience.
The first reaction I have seen from executives and teams after deploying a NPS practice is “Ok, customers do not like us, now what?” It takes a fair amount of commitment and resources to move from the “Discovery” phase into “Taking action” and this requires organizational alignment as well as changes on systems and processes that start with having the customer experience at the center. Particularly in web2.0 properties there is an excellent opportunity to establish a NPS practice that goes beyond measuring hypothetical situations and into “observing” actual behavior. It is also important to understand that establishing a NPS offers us “directional” information, but it cannot be approached as a CRM practice where we address customers concerns on a one by one base, which is also a fairly common mistake when discussing the value of the NPS practice in a company…
I elaborate more on this area as well as on five critical steps to implement a NPS practice on the second part of this post.