Thursday, July 19, 2007

The Net Promoter Debate

There is a healthy conversation happening about Net Promoter, it's link to growth, and it's success in driving customer centric organization.


The debate has been stirred up recently by a paper published in the Journal of Marketing where they authors attempt to discredit the research done by Satmetrix and Fred Reichheld on the connection between Net Promoter and growth.

After reading the Journal of Marketing paper, I have the following observations.

1. In Table 1, they show a correlation between revenue and commonly used satisfaction/loyalty metrics in various industries. The Net Promoter research was done at the organizational level demonstrating the correlation of an organization's Net Promoter Score and their growth rate. The research in the Journal of Marketing is different in it's approach and has little in common with the original research. Organizations use Net Promoter to measure their own customer loyalty and to benchmark their performance relative to their competitors.

2. In Figure 1 the Journal of Marketing research shows that Net Promoter is, at a minimum, equivalent to ACSI in correlating to growth. That says that a simple metric driven by a single question is at least as accurate at predicting growth than a more complex algorithm driven by multiple questions.

3. This conversation is missing the point that is attracting business leaders. The value of Net Promoter is its simplicity. Unlike complex satisfaction indexes, Net Promoter is easy to understand and take action on. Simplified surveys drive higher response rates, a better reflection of the customers that matter, rather than random sampling. Using real-time reporting, leaders can get information in the hands of employees that can address detractors, move the passives and nurture the promoters.

At the end of the day, it’s what companies do to improve loyalty that drives growth. Net Promoter offers an approach that is understandable by everyone in the business, not just the statisticians. This gives an organization a rallying cry for building customer-centric organizations. The paper lists a number of business leaders that are doing exactly that including companies such as GE, T-Mobile, Intuit, Progressive, Overstock.com, and American Express.

Net Promoter is a disruptive approach to traditional research. It does not attempt to replace all forms of market research, but creates a formula for understanding customer loyalty and focusing an organization on delighting customers and building Promoters that will protect and grow revenues. Net Promoter is not just a score, and not just a survey design; but an overall approach for how organizations collect, distribute and use the information to improve customer relationships. Leaders adopting Net Promoter want to do more than watch the score, they want to improve it. Read the many success stories of companies adopting Net Promoter and decide for yourself whether this approach will help you drive customer centricity in your organization.

Here are some of my favorite responses to the debate:


NPS What is it REALLY good for...
, where the author says:

This all aside, however, I think the true value of the Net Promoter Score as a tool within companies lies simply in the focus on the customer it generates.
Where many marketers are now buried under reams of data, KPI’s, customer satisfaction studies, brandvalue analysis, etc ad infinitum, this is replaced by one single and easy to handle and understand metric. It focuses the organization on concrete results, on “how will we delight” instead of generic customer satisfaction indexes. It creates a dollars-and-cents conversation due to the measurable value of an individual promoter to the company. And again it focuses the organization on precisely that point – to get more profitable customers (insert dollar value here) I need to improve specifically X, Y and Z. “Here you go, dear finance director – my new marketing initiative will generate this ROI for the company, because of 500 detractors being turned into promoters, generating 1000 X, 500 Y and 750 Z. “


Net Promoter and Customer Loyalty

But does this matter? The answer is probably not. While Keiningham’s statistical analysis might be correct - and it’s important that we should take no proprietary management tool as gospel - it perhaps misses the point. Brands everywhere need a simple method to point them in the right direction; if anything encourages them to cut down on long, pointless customer surveys and look more closely at what people really want, surely that is a good thing?


Posted Love this comment on July 19, 2007 17:55
Alain Thys:

Stefan

to continue our phone conversation online :-) I thin k you hit closest to home with the "focus comment". As a CEO or Senior executive you're confronted with a gazillion KPI's which gives everyone in the organisations a large amount of excuses to everything under the sun, except "delight" the customer. focusing everyone on "one metric" may not be academically correct (but who cares), it does get the point across and eliminated internal excuses. It also is extremely helpful in getting various "silos" in the organisation to pay attention to the same thing.

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5 Comments:

At 10:17 AM, Blogger Tim Keiningham said...

Dear Ms. Eastman –

My co-authors and I would like to comment on your mischaracterization of our findings.

1) To state that our research has little in common with the research conducted by Reichheld and Satmetrix is inaccurate. Our industry information and revenue calculations were done at the six-digit NAICS code level for four of the five industries in our analysis. That is as unit-specific as it gets. [Given that Das Narayandas of Harvard is on the board of Satmetrix, perhaps you can get him to corroborate the unit-specificity of our analysis.]

2) Your argument that Net Promoter is “at least” as good as the ASCI is a red herring. THE REAL ISSUE IS RESEARCH BIAS.

In the Harvard Business Review article that introduced Net Promoter, in the book, The Ultimate Question, and in presentations regarding Net Promoter, the American Customer Satisfaction Index has been specifically mentioned as not linking to firm growth by Reichheld. The book, The Ultimate Question, argues that the ACSI does not yield much insight into loyalty or growth, noting that “investors rarely waste money on standard satisfaction surveys” as a result (The Ultimate Question, p. 86).

Similarly, an article in the Harvard Business Review states (p. 49): “Our research indicates that satisfaction lacks a consistently demonstrable connection to actual customer behavior and growth. This finding is borne out by the short shrift that investors give to such reports as the American Customer Satisfaction Index. The ACSI, published quarterly in the Wall Street Journal, reflects customer satisfaction ratings of some 200 U.S. companies. In general, it is difficult to discern a strong correlation between high customer satisfaction scores and outstanding sales growth.”

Furthermore, in a web-based presentation, Mr. Reichheld states that a “Bain team looked at the correlation between growth and customer satisfaction, and found there is none.” A scatter diagram was shown with the X-axis labeled “American consumer satisfaction index annual growth” and the Y-axis labeled “Sales annual growth.” The R-square reported was 0.00, indicating no correlation whatsoever.

Given that our findings show that Net Promoter was not superior to the ACSI when using Reichheld’s best-case scenarios, it is virtually impossible to imagine a scenario other than research bias as the cause. This is a VERY SERIOUS problem. We expect research published in our most prestigious journals to be free of bias in management science, just as we do in all other fields of study. We would not consider this kind of problem acceptable had the research been conducted in medical, psychological, or physics research; the same standards apply in management science.

Managers have adopted Net Promoter based upon the belief that solid science underpinned the claims attributed to the metric. In fact, there would have been no Harvard Business Review paper introducing Net Promoter without the research. This also has serious implications regarding the credibility of Reichheld’s book, The Ultimate Question. Additionally, biased “research” that is published in a prestigious management journal contaminates not only management practice, but also management science, as it will be used by scientists as a basis for future research.

Net Promoter “Believers” typically focus on “testimonials” from users or “qualifications” regarding the usefulness of the metric in response to evidence contradicting their earlier assertions and beliefs. Unfortunately, as “researchers” this is the equivalent of ignoring the 900-pound gorilla in the room; the research upon which Net Promoter is based is the sole reason for its existence. If it is biased, then it is disqualified—period.

It is vital that we not be apologists or revisionists when it comes to issues of research bias. Our credibility must never be in question regarding the research we publish in prestigious journals; the truth matters. Therefore, discussions about Net Promoter by researchers (practitioner and academic) must first adequately address this issue. If not, then why do any research at all, as we can simply present the answers we want to believe as supporting evidence and be done with it? Given the evidence we uncovered, however, we seriously doubt that there will be an acceptable answer to the issue of bias in Reichheld's reported research. [Ironically, in The Ultimate Question, Reichheld emphasizes the importance of eliminating bias from research (pp. 106-111).]

While we can all agree for the need to have measures that are easily understood and used by managers, that is completely irrelevant to the issue at hand. Regardless of whether or not one chooses to believe in Net Promoter, we all must insist that the evidence used to support the metric be unbiased. This issue is so overridingly important to very core of what we as researchers (academic and practitioner) do and stand for that it must be addressed. Our credibility in science and in practice is based upon honest and fair evaluations of data...if this is contaminated and unchallenged, then there is no reason to believe anything we say.

Sincerely,

Tim Keiningham

 
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