How NPS Correlates to Long-Term Revenue Growth
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March 21, 2014
It’s been 10 years since Fred Reichheld first introduced Net Promoter Score (NPS) in his Harvard Business Review article “The One Number You Need to Grow.” Since then, thousands of companies have implemented NPS, including industry leaders like Apple, Intuit, Facebook, Southwest Airlines, and American Express. Now, with a ton of industry momentum, has NPS proven out Reichheld’s original title? Has the system shown that it can propel meaningful revenue growth?
In his latest book, The Ultimate Question 2.0, Reichheld argues yes, NPS does drive financial growth. Here is some data that Reichheld and his team have gathered over the last decade to quantify and substantiate the connection between NPS and long-term sustainable growth:
- NPS leaders tend to grow at more than twice the rate of their competitors.
- Of the nine percent of companies that have registered sustainable, profitable growth, NPS scores were, on average, 2.3 times the scores of other firms in their respective industries.1
- Apple retail store managers call detractors within 24 hours of an NPS survey submission. They then tracked the purchase patterns of detractors that had spoken with store managers vs. those that hadn’t and discovered that the former spent significantly more, resulting in more than $1,000 in additional revenue or $25 million in the first year.
- Phillips electronics tracked NPS for a sample of accounts over time and found that where NPS increased, revenue grew by 69%. Where it remained steady, revenue grew only by six percent. And where NPS declined, revenues actually decreased by24%.2
These examples of significant revenue growth require efficiencies that are achieved by effectively implementing and nurturing NPS. Focusing on your customers and their experience works to create an army of brand promoters, who in turn act as a free sales and marketing engine by spreading positive word of mouth and generating referrals. In addition, promoters remain loyal, weathering company challenges and withstanding price fluctuations.
But not all NPS implementations have been as successful at tying efforts to sustainable revenue growth. And if this connection is not made, most implementations will fail to capture executive support and lose momentum. Here are some tips for successfully establishing this connection in your organization:
- Invest in the NPS microeconomics.The first step is to calculate the lifetime value of your average customer (CLTV). Then, using this as a baseline, tally up the differences in promoters, passives and detractors. Once you understand the difference in value between a promoter and detractor, you can build a cost justification and ROI for the investment required to turn detractors and passives into promoters.
- Get Your CFO Involved.Because NPS tends to be labeled a loyalty program, it often lives in the marketing department, where it can quickly be dismissed or shortchanged during resource allocation and budgeting. Make sure your CFO is involved with the process from the project’s inception and plays a key role in customizing the microeconomics for your organization. Only when metrics and analytics are applied and show positive return will this program turn into the long-term cultural shift required for sustained growth.
- NPS is a journey. NPS is not a quick project, and its implementation is not easy. It requires executive commitment, dedicated leadership, widespread acceptance, financial investment, and on-going scrutiny. This is not an initiative that will be wrapped up in a few months but rather an on-going process that will become an integral and pervasive part of how you do business. Though challenging and resource intensive, the payoff is worth it – real, sustainable revenue growth.
Sources:
1. The study analyzed 12,000 companies and found that only 9% grew revenue and profit at a minimum compound growth rate of 5.5% while earning their cost of capital.NPS scores of these companies were calculated and compared.
2. Source: Q2 2009 Royal Phillips Electronics earning presentation
This is a guest post by Wes Hayden is the CEO of VHT. VHT’s Conversation Bridge is a simple solution with huge impact that provides customers a consistent experience no matter how they try to contact you. Follow Wes on Twitter @WesHayden.
Photo Credit: SalFalko via Compfight cc
11 Comments
Great post Wes. Can’t have an effective social program without NPS microeconomics.
Hello Adrian,
What nonsense! Is that what the guys at WhatsApp did? Or perhaps the guys behind Skype did? Of perhaps, Zappos does? Maybe Amazon? Or John Lewis?
You do what is right because it is right. If you get the numbers guys involved you find yourself deep in the numbers. Finance folks know all about costs and little about investment to generate growth. Finance find it easier to kill than to grow.
Maz
Hi Maz,
I agree with you when you say that ‘You do what is right because it is right’ but not sure that I agree with you re finance. I guess that you take a dim view of people that typically work in finance.
However, I have asked Wes (the author of the guest post) if he would like to comment.
Adrian
Maz,
First, I agree with your assertion that companies should do what is right for customers.
However, not collaborating with the finance folks — or any other department for that matter — is not optimal for business or customers. Customer service is a cross-functional effort.
While it’s unfair to pigeon-hole finance people, I do understand some of the tensions that can arise between what the numbers people want versus the business people. But cutting off the finance people is not the answer. Like most things in life and business, it’s about getting all the stakeholders in the same boat. Get the finance people involved in the NPS effort and make them own some of the numeric results. You’ll find you won’t have the same challenges justifying the need for customer service in ways that are right for the customer.
Wes,
At the risk of piling in, I’m afraid I’m with Maz. All I see is companies chasing the NPS score, not thinking about what it means.
So whilst I agree with you wholeheartedly in principle, I’m afraid in reality I agree with Maz, chasing an NPS score is nonsense.
Nice controversial post though.
James
“Chasing a score” is indeed nonsense. Following the Net Promoter System is not. Corporate strategy is about devoting scarce resources to the few things that make you different or better than your competitors. Telling leadership to “Trust me” when asking for investments to improve customer experience is immature and pointless. You need to demonstrate the financial impact of a change in NPS relative to your competitors’ NPS. If your CFO publicly disagrees with the way you did the analysis, you are doomed. You have to do the work jointly with Finance. In my experience of doing so, they welcome it.
Thank you and well said, Maurice.
And Maz, I know the answer to at least one of your questions. Yes, Zappos uses the Net Promoter System and is one of the best examples of using it well. Apple too. I don’t know about Netflix or Amazon.