Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
Fred Reichheld and Rob Markey's book The Ultimate Question 2.0 is a follow-up to the bestselling book that first helped businesses understand their Net Promoter Score. One question -- would you recommend us to a friend? -- offered businesses a vital metric that has since been adopted widely by organizations, including GE. Peter Fader, Wharton marketing professor, co-director of The Wharton Customer Analytics Initiative and author of Customer Centricity: What It Is, What It Isn't and Why It Matters, spoke with Markey about what NPS is, how companies can increase the number of people who promote them and why it is now a system and not just a score.
An edited transcript of the interview follows:
Peter Fader: Can you tell us what NPS stands for? Those three letters are on everyone's mind these days, and a lot of businesses are being run by them.
Rob Markey: NPS originally stood for Net Promoter Score. It was designed as a way to help marketers, operations folks, call center operators and business leaders figure out the extent to which they were really meeting their objective of earning the loyalty of their customers. You get your Net Promoter Score by asking one simple question: How likely would you be to recommend my company, my product or my service to your friends, your colleagues or your family members? Based on the answer to that question, we can then sort customers. Promoters are the people who are enthusiastically loyal to your brand, your company and your product. They are out there telling all their friends and personally buying more, staying longer and helping build your business. The passives -- people who are passively positive -- think your stuff is okay. The worst group -- the detractors -- just really dislike doing business with you. They would leave if they had a choice. They tell their friends how terrible it is to work with you. You get your Net Promoter Score by taking those promoters and subtracting out the detractors.
Fader: The research that you and Fred Reichheld have done has shown that NPS has some amazing associations with other, more bottom-line-oriented business metrics. Tell us about those.
Markey: The essence of it boils down to the fact that individual customers behave consistently with the designations "promoter," "passive" and "detractor." If you are a promoter, you are buying more, staying longer, telling your friends and building the business. The detractor is doing just the opposite. That's the foundation. On top of that, we have discovered that if you compare one company's score to another company's score in the same industry and in the same market, you will find that the one that has a higher score tends to outgrow the one with the lower score. In fact, the Net Promoter Score leader in an industry, in a market, tends to outgrow its competitors by a factor of more than two-and-a-half to one. That was the thing that started to really make this catch on, because people understood suddenly, "If I can grow my Net Promoter Score, then I can get more customers to stay longer, buy more and tell their friends. I can outgrow my competitors, and I can even, in some cases, achieve a cost advantage."
Fader: I have to admit my initial bias and skepticism. As a marketing professor, as someone who focuses on measurement, when NPS first came out, my reaction was, "It's too simple." Knowing that there are so many colleagues in the field and other companies who have been working on very similar kinds of measurement issues, but capturing, for instance, the multidimensional aspect to satisfaction or loyalty, my reaction was, "You can't boil it all down to one thing and have it work for you."
Markey: Well, you can't, actually. The truth is that the Net Promoter Score is designed to be radically simple, not because it is statistically better, but because it is statistically fine and that simplicity appeals to frontline employees. Even CEOs can understand it.
The designations of promoter, passive and detractor are based on one question. It's a simplifying construct that helps motivate and inspire people to want to create more promoters and fewer detractors. If you really wanted a statistically robust thing that was about the statistically accurate correlations, you would always go for more questions. But what we found is that there's about a 10% or 15% improvement by adding more questions in terms of statistical accuracy, but it tremendously degrades your ability to motivate the organization to take action because then you get into these debates: Which questions are part of the index? How are they weighted? I don't know, maybe that question isn't relevant for my business. Then you end up debating the score and not actually focusing on what matters, which is getting your customers to stay longer, buy more and tell their friends.
Fader: Indeed, what you've just described is very consistent with the academic research, which shows that a richer, multidimensional scale can be 10% to 15% better. But this one question -- this ultimate question -- really is good enough. In the academic community, it's kind of a half-full, half-empty [situation]. I'm a half-full kind of guy, saying, "Give me a measure that is good enough, one that managers can actually appreciate, understand, implement and spread throughout the organization." It raises the whole idea of measurement and understanding customer differences to a level that we've never seen before in any organization.
Markey: We are proud of what we have been able to accomplish from a practical perspective with Net Promoter Score. I think what motivated us to start thinking about those three letters as standing for the Net Promoter System was that the appeal of this radically simple approach [meant] some companies were using it really well, and other companies, honestly, were only calculating a score. It wasn't impacting their business, and they were saying, "We're not getting impact here. We're measuring. What's going on?" The frustration that they felt and that we felt watching them led us down this path of trying to discover what the differences are between the companies that are getting real impact and the companies that are failing. That led to this insight that there are three things that the successes are doing that the failures aren't, and that was the foundation of the Net Promoter System.
The first one is that the companies that were doing really well had a really robust and thorough way of collecting the data to create a reliable score and outcome metric. The foundation of the application of this was built out, in some ways, at GE, where they were trying to apply Six Sigma to service operations and sales. You can't apply Six Sigma unless you have a reliable way of identifying a defect and a success, and Net Promoter became that outcome metric for them. If the fundamental outcome metric is unreliable because you failed to sample appropriately or because you are asking the question in a way that frames it with prior questions or because you are inconsistent about the set of product services, you have no basis for making decisions about where the defects lie and where the opportunities are to create promoters.
Number two, and this is maybe most important: The successes were using the feedback that came out of Net Promoter as the basis for fast-cycle, closed-loop learning action and service recovery. Instead of just treating this as a score to calculate and something to measure, they were actually turning it into an operational and functional part of their business. They take the feedback directly from a customer, give it to the employee who had been most responsible for creating the outcome within 24 hours and then coach them on how to improve. That timing is important because if I am the person serving you, I can remember the interaction we had that created your feedback as opposed to what we traditionally do where we aggregate months of data, give an employee an average score and say, "Okay, improve." This closed loop became the second thing we discovered.
The third -- in a way it sounds so trite and obvious -- the companies that were successful believed deeply, from the senior leadership on down, that earning the loyalty of their customers was really critically important to their business strategy and that that was how they were going to grow profitably. The score and the system were a way of helping achieve that objective. The failures almost invariably set a goal on a number: "We want our Net Promoter Score to be higher than it is today," or "We want to earn the JD Power Reward." Then they delegated it to the Head of Service or somebody deep in the organization, and said, "Okay, go do that, and tell me how it goes."
Fader: For those firms that really embrace it, as you just said, there are going to be broader, more fundamental organizational changes. Tell us how companies have realigned themselves around the Net Promoter system.
Markey: It is a big deal. What sounds so simple -- sorting your customers into promoters, passives and detractors -- turns out in practice to have profound impacts for your culture, the way you organize the processes by which you run the business. As an example, in most of the companies that are doing this really well, you have infrastructure to help figure out which customers are promoters, passives and detractors, to take action against that and to figure out what the value would be of turning a detractor into a promoter or turning hundreds or thousands of customers from detractors into promoters. You end up having the guys in product development suddenly changing the way that they think about success. Instead of just getting the product launch out and having lots of initial sales, they now not only have to have lots of initial sales, but they have to have a high Net Promoter Score. In fact, at Logitech (Nasdaq: LOGI ) , each successive product release has to have a higher Net Promoter Score than the one before it. At Intuit (Nasdaq: INTU ) they do the same thing. It actually changes their perspective in the development of new products.
Fader: I'm interested in the step beyond. I have a recent book on customer centricity that says companies need to be following a fundamentally different strategy: Let's sort out different kinds of customers -- the good from the bad -- and realign everything we do, from product development on down, around the better kinds of customers. Are we seeing fundamental shifts in strategy as people have something like NPS to guide them?
Markey: We are, although, I would say that the companies that are successful actually start with the principles that you are talking about, Pete. Net Promoter System works best when it's embedded in a culture or company that fundamentally believes that earning more loyalty from the profitable customers is the strategic outcome that they are trying to create.
The Net Promoter System helps provide guidance about where to focus, what actions to take to get there and how to help tens, hundreds or thousands of individual employees align their actions around that objective. But that doesn't substitute for business strategy and what you are talking about. I love your new book. What you are talking about there is the more fundamental question: Which customers' loyalty should I be striving to earn, because they are the ones who offer the greatest potential in the marketplace and because my company has skills, capabilities and a market position that allows us to be more successful with that group of customers.
Fader: We have gone from Net Promoter Score, a particular measurement device, to Net Promoter System, a broader system to help companies better appreciate and leverage what they get out of that score. Thinking ahead two or three years, what's next?
Markey: I think you are going to see two big areas of focus from us and from our clients, the members of the NPS Loyalty Forum. One we mention in the book: There will be significantly more focus on this linkage between employee advocacy and customer advocacy. We recognize that it is very hard to sustain high levels of customer focus, of customer centricity and of customer advocacy unless you have also earned the same thing from your own employees. There are specific things you can do on the employee advocacy side that lends themselves more to customer advocacy, so that's one.
The second is around innovation and design for delight, as some people call it, or the process of designing products, services and value propositions that will differentially create promoters. In the early days, partly because its foundation was at GE with Six Sigma, defect elimination, a lot of the emphasis was on rooting out those defects, the things that create detractors. And now we are spending a lot more of our energy around the things that you can do to create promoters and even to what we call "activate" promoters. Give your promoters a voice, a story to tell, a reason to get excited about talking to their friends about your company.