Answering the Ultimate Question: How Net Promoter Can Transform Your Business

Introduction

How likely is it that you would recommend this company to a friend or colleague? That’s the ultimate question. Fred Reichheld’s book of the same name started a transformation in how businesses think about their customers. Published in 2006, it challenged the conventional wisdom of customer satisfaction thinking and coined the terms bad profits and good profits—a distinction between profits gained at the expense of customer loyalty and those that were not. Reichheld’s book took a critical look at many of the existing practices around customer satisfaction survey-and-analysis research practices, finding much of it to be ineffective at driving business outcomes. The book inspired business leaders to put customer loyalty at the front of their agenda, not just because it was the right thing to do but because it was the best way for their businesses to increase retention and growth. As you have probably guessed, we are fans of Fred Reichheld’s work, but it horrified many in the traditional market research community who saw it as an assault on their science. We think they missed the point.

One Powerful Question, Many Powerful Insights

In 2000, we began a journey to understand the linkage between customer loyalty and profitable growth. Frustrated by our observation that few corporate leaders took the topic of customer loyalty seriously, we sought a model that would convince them, using data, of something we all intuitively understood: customer loyalty drives financial performance. In a research project between Fred Reichheld and Satmetrix (our technology company focused on automating customer loyalty programs), we tested potential loyalty predictors. Based on a database that Satmetrix had developed, Reichheld and Laura Brooks generated a series of insights around buying behavior, resulting in Reichheld’s breakthrough 2003 Harvard Business Review article, The One Number You Need to Grow. The Net Promoter Score (NPS) was born.

At its inception, NPS represented an important advance in measuring the relationship between companies and their customers. NPS is based on one simple question: How likely is it that you would recommend Company X to a friend or colleague? It helped articulate what many businesses understood intuitively but were unable to easily capture and represent: that within their customer base, there are individuals who contribute to growth through their purchasing and referral behaviors (Promoters), impede growth due to their negative referrals and high cost to serve (Detractors), and represent unrealized opportunity (Passives).

Measuring and tracking NPS—the percentage of Promoters minus the percentage of Detractors—serves as both a measure of the success a company has achieved in building a positive customer experience and a leading indicator of its prospects for growth. We asked a simple question that cut to the heart of loyalty and found compelling data that correlates NPS with business growth.

That was then. Today Net Promoter is more than a metric. It is a discipline by which companies profitably grow by focusing on their customers. A successful Net Promoter program is multidimensional, including NPS measurement, leadership practices that instill customer focus, organizational strategies to ensure program adoption, and integration with core business processes and operational systems to support information collection, analysis and distribution. The Net Promoter discipline has become integrated in the operations of organizations around the world.

This simple, but powerful, concept gained momentum due in equal measure to its intuitive nature and its potential for fostering change on behalf of customers. However, it became apparent that companies needed a strategy to use the score to create effective change. We found that many organizations that had made investments in Net Promoter programs achieved mixed results. All too often they discovered that harnessing a powerful yet simple idea requires sophisticated approaches and many choices along the way. Business transformation is never an easy task, and it should come as no surprise that decisions made regarding the implementation of Net Promoter can mean the difference between business impact and just another metric to post on the wall.

Our delight at the rapid adoption of Net Promoter was tempered by anxiety. We were alarmed by the number of companies that were publicly declaring their commitment to Net Promoter but, by their own standards, were making unsatisfactory progress toward driving business success with those programs. At the same time, no one could fail to be impressed by some of the innovations fostered by the use of Net Promoter by leading companies. We felt an urgent need to share the best practices of the companies achieving success.

What Did Companies Do with Net Promoter?

Our challenge, and the motivation for this book, was identifying the actions that companies take to achieve Net Promoter success. Put simply, what has worked? We believed that if we could build a Net Promoter Operating Model based on the answers to that question, we could create a practical how-to guide targeted at practitioners who seek to implement a program themselves.

Since the original research, we have had the opportunity to examine hundreds of companies that have implemented, with varied approaches and equally varied degrees of success, Net Promoter within their businesses. We talked with CEOs, line managers, executives, and employees and did our best to capture their wisdom. Through the website netpromoter.com, we have seen thousands of participants exchange ideas on what worked for their business and what did not. We developed a measurement framework that we used to gather data across many of these companies. We then examined the multitude of programs that we had been involved in, as well as interviewed many great companies with which we had no involvement. In short, we believe we developed the most comprehensive perspective on Net Promoter success that exists today.

Pivotal Practices Make or Break Programs

From these studies, we learned that while 68 percent of companies rated themselves as highly customer focused, only 15 percent would claim they are executing their Net Promoter programs effectively. Digging deeper, we identified critical practices that influenced their progress and we share them in detail in the following chapters.

The most significant insight we hope you take away from this book can be summarized as this: thinking about Net Promoter as only a score trivializes the implementation of a major corporate transformation and is a sure recipe for disappointment. If you learn nothing more from this book, you are starting to move in the right direction. Thinking of Net Promoter as an enterprisewide program—applying management disciplines and techniques with appropriate leadership and investment throughout the organization—is what gets results.

A How-To Manual for Net Promoter Success

Many readers are already familiar with Net Promoter. A visit to netpromoter.com and reading Fred Reichheld’s The Ultimate Question will fill in the blanks. This book begins from Net Promoter conceptualization, represented by these sources, and proceeds to Net Promoter actualization. Along the way, we look at the elements that make up a successful Net Promoter program and share the experiences of a number of companies that have made Net Promoter an integral part of their organizational processes.

By its nature, a Net Promoter program pervades the organization. Risking a cliché, it becomes part of a company’s DNA. That said, employees’ participation is very much role based. Customer-facing frontline employees and their managers will naturally have different perspectives from those of executives, but each one’s role and perspective is critical to program success. We explore these various roles and responsibilities.

This book is written for those interested in improving the customer experience and increasing loyalty. We believe that everyone in an organization can have a positive impact on customers. The chapters are designed to reflect our Net Promoter Operating Model and provide insights to help in constructing a successful program and avoiding pitfalls. The chapters are largely self-contained, and although we think they are best read in sequence, the nature of the material does not always lend itself to a sequential storyline. It turns out that programs evolve in many ways, and key concepts often apply to multiple areas. Feel free to read the index and dip into specific areas of interest.

True Stories from Real Businesses

We had the good fortune to look under the hood of many great companies and their programs. We selected examples and case studies with the principal goal of illustrating success or validating our conclusions. We also sought diversity, large and small companies, U.S.-based and European, so you can find examples that you can relate to. Not all of these companies are famous yet, but if they keep doing what they’re doing, many of them will be.

We believe that everything you need to know to create a successful Net Promoter program is described in this book, along with proven ways to implement it. If you apply these learnings, you will have a consistent measure of customer loyalty and a quantitative process for tracking changes over time. You will be able to take action on data, close the loop with customers, and tie loyalty directly to financial results. You will create a program that includes everyone in your company in the pursuit of customer-centric excellence.

October 2008

Laura L. Brooks, Ph.D.

Richard Owen

1

Net Promoter Fundamentals and Operating Model

We have driven, since early 2000, the notion that to be customer centered is a very important part of the value system of our company and we have to keep that ever present in our minds.

John W. Thompson, chairman and CEO, Symantec

This chapter lays out the basic elements of the Net Promoter Operating Model and sets the context for much of the rest of the book. You may think this is an obvious task, but when posed with the question, What is Net Promoter? we found that beyond the metric, no consensus seemed to exist. We start with the metric, summarizing the underlying concepts that support it, and draw a distinction between it and more traditional approaches. Finally, we propose a model to build a Net Promoter program and drive a customer-centric culture.

A Net Promoter Primer

Is Net Promoter a metric or a way of doing business? The answer is both. Net Promoter is a discipline that has progressed well beyond the computation and into a series of best practices that drive positive financial results for the organizations that adopt it. This chapter goes beyond the simple mathematics required to calculate the metric and into the discipline that makes Net Promoter work. Applying Net Promoter as a management discipline separates successful programs from those that fail. However, before we elaborate, let’s review Net Promoter the metric.

Net Promoter is the most progressive methodology in loyalty measurement. When people refer to the Net Promoter question or the Recommend question, they are referring to the ultimate question from Fred Reichheld’s book of that title: How likely is it that you would recommend Company X to a friend or colleague? The response to this question has proven to be an effective means for measuring customer loyalty and ultimately long-term growth.

In order to calculate the Net Promoter Score (NPS), the Recommend question should be asked using a scale from 0 to 10, in which 10 is extremely likely and 0 is not at all likely. The calculation then takes the percentage of respondents that select a rating of 9 or 10 minus the percentage of respondents that select a rating of 0 through 6 (see Figure 1.1).

NPS captures two key behaviors: buyer economics (the value of the customer) and referral economics (their potential value through referral). The first deals with an individual’s own choices and the second with how those choices influence others. The difference—the net—is the metric of interest. It takes into account the positive impact of Promoters (higher repurchase rates and referrals) and the negative impact of Detractors (negative comments, lower repurchase rates) to yield a summary metric. This is particularly critical in today’s connected world, where word of mouth can spread more quickly and positive or negative sentiments can remain on the Internet for a long time.

Figure 1.1 Calculating the Net Promoter Score

NPS’s compelling benefit lies in its ability to capture the net effect of customers who promote over customers who detract. By taking into account the increased growth achieved through positive buyer purchase and referral economic behavior, as well as the impediment to growth caused by the effects of reduced customer purchase and negative referral behavior, NPS provides an accurate assessment of customer loyalty and its impact on growth.

The payoff for a company with an improving NPS is reduced customer churn, decreased cost to serve, increased lifetime value, and improved cross- and up-sell opportunities. NPS also reflects the reality of word of mouth since Promoters provide positive word of mouth, and Detractors engage in negative word of mouth about the company and its products or services.

Some have argued that Detractors don’t matter—that they don’t actually have a negative impact on a business. Based on three years of data comparing NPS and publicly disclosed financial results, it is clear that there is a direct correlation between increased scores and increased revenue growth. Similarly, higher percentages of Detractors also link to reduced growth rates (see Figure 1.2). This evidence shows that it is not just Promoters but the absence of Detractors that create a positive growth engine.

Why Traditional Approaches Fail

Successful Net Promoter programs are not traditional customer satisfaction programs with the Recommend question added for convenience. Before Net Promoter, many customer satisfaction programs yielded management reports that lacked credibility. Perhaps more important, they didn’t deliver business results. Before we lay out what makes an effective program, it’s worth considering the contrast with prior approaches. We have boiled this down to the distinction between research studies and operational programs.

Figure 1.2 Revenue Growth Rates by Promoters and Detractors

Source: Satmetrix client data. Average international NPS from 2002-2004 (N = 12, n = 80,000); public financial data 2003-2005 or 2004-2006 depending on fiscal year.

An Operational Approach, Not a Research Project

Research-based approaches to customer satisfaction have not been tremendously successful in terms of improving satisfaction. Customer satisfaction scores for the majority of large corporations have not historically shown significant improvement. Although annual reports highlight the importance of customers (usually accompanied by glossy photos and glowing tributes), many CEOs, when interviewed, have expressed a lack of confidence in their customer satisfaction efforts or a disregard for the programs that exist. Billions of dollars a year are spent on customer satisfaction surveys and market research, and outcomes seldom seem to result in any real changes to the business. Consider your own experiences as a consumer. When you fill in a customer satisfaction survey, do you believe that something will happen as a result?

Research can be valuable for the organization, but viewing your investment in customer loyalty as a research project is setting your efforts up for failure. We unfortunately continue to witness the stereotypical annual customer satisfaction report, presented to a suspicious executive team that invests just enough time to argue its validity before consigning it to the corporate bookshelf for another year. This is the classic outcome of a program that is driven from the needs of research rather than the needs of the business.

By contrast, an operational approach starts by understanding which customer data and internal processes will create change across the organization and how to use that information effectively. Whereas a research approach focuses on creating an insightful report for a handful of executives, an operational approach is concerned with building a program that engages the entire organization in improving customer relationships. Your operational program quickly becomes part of the ongoing management processes and touches line employees in their everyday jobs.

Creating a new research project that simply uses and measures NPS won’t change your business; no miracle will occur simply from adding the Recommend question. Instead, success will come from grounding your program in an operational approach and applying Net Promoter principles one customer at a time.

Satisfaction Versus Loyalty

It’s worth clarifying the difference between satisfaction and loyalty. Simply put, satisfied customers still defect. The fact is that satisfaction is a standard that had great meaning in the postwar industrial growth of Europe and the United States but falls short against the standards of global hypercompetition today. Worse, it provides a false standard that undermines the impact that leadership could obtain by applying a higher standard to their businesses.

If you turn on your TV and see a company claiming to have 90 percent customer satisfaction, what does it tell you? It certainly indicates that the company’s basic products or services seem to work as advertised. It might also suggest the company is able to handle inevitable problems in a reasonable and timely fashion. You might even suppose that this business’ help desk phones are not clogged with customers calling in to complain about the company. But does any of this sound like a basis for competitive advantage or an engine for growth?

Net Promoter programs establish a higher standard than simple satisfaction, one worth holding your business to. There is no false sense of comfort, just a real focus on the drivers of growth and competitive advantage.

Dell, the world’s largest direct-sale computer manufacturer, runs a global customer experience program and understands the distinction between satisfaction and true loyalty. Dick Hunter, who heads the global consumer support program, told us:

The thing I was struck by is that we were all hung up about customer satisfaction, and I frankly didn’t think that was the right goal. It’s one thing to have a customer call us with a problem. We solve their problem, and they’re satisfied with the fact that we solved the problem. It’s an entirely different matter if, after a customer calls us, they’re much more loyal to us and say, I’m going to buy from Dell forever because I really get great service and that’s part of the overall experience that is great and I couldn’t imagine buying from anybody else. There’s a huge difference between those two. And my view was that we had to go toward loyalty and move away from satisfaction.

We couldn’t agree more.

Loyalty Metrics Held to the Standards of Financial Reporting

If you have heard Fred Reichheld speak, you may have heard him refer to his goal of having the NPS achieve the same standards of rigor and auditability as accounting based on Generally Accepted Accounting Principles. Most companies take financial reporting seriously. They hire outside auditors to confirm that their representations of the facts are accurate. Standards exist and evolve to meet the needs of current business practices. The repercussions of misrepresenting the numbers can be very serious under law, including jail time.

Another way to look at financial reporting is to understand that the most important output of good reporting is quality data given to management on which they can base important decisions with confidence. In other words, this is information for running the business. In the same way, a Net Promoter program should provide quality customer data that enables strategic decision making.

Now picture the way most companies review customer satisfaction data and imagine for a minute using the same method for reviewing financial information. Board meetings would consist of lengthy sessions where the accounting team seek to explain the meaning of the organization’s performance in statistical terms that only they could understand. Executives would debate the validity of the numbers. There would be a refusal to take action because the board relentlessly questions whether those are real numbers or even realistic scenarios. Department heads would claim to understand the true picture around actual and projected revenue without this and would argue they don’t need accounting telling them what they already know about their business. Why spend money on this kind of data anyway?

This scenario is a bit absurd, yet it’s exactly what happens with customer data when it fails to achieve a standard we reserve for critical information about our business. Net Promoter differs from traditional satisfaction metrics in that it focuses on customer data as an instrument for general business management, not just customer research, and because it is simple for everyone to understand and is actionable by employees. Moreover, the emphasis on obtaining high response rates, census approaches in business-to-business markets, antigaming focus, and methodical goal setting are all part of what makes the Net Promoter approach more trustworthy. Boards and management can use Net Promoter data just as they do financial data to make decisions that grow the company.

Bad Profits

The concept of bad profits is critical to Net Promoter. We were recently challenged by an executive to explain why the term bad profits is not an oxymoron in the business world. Well, that’s exactly the problem many companies face. The simplest way of looking at bad profits is to consider them profits that come at the expense of long-term growth because of the Net Promoter penalty they incur. They are short-term profit and cost friendly, but long-term customer and profit unfriendly.

There does seem to be a lot of confusion around this issue, so we illustrate it with our favorite example of a CEO who understands the difference, Rupert Soames from Aggreko. He nailed it for us:

The disadvantage of financial reporting is that it is a lagging indicator, not a leading indicator, and the lag can often be quite long and quite severe. Managers are confronted daily with the opportunity to make more profit in the short term and give poor customer service at the expense of irritating their customers in the long term. What I have always been looking for is a way of squaring the circle that will enable us to say to employees, Yes, you are to make as much profit as you can, but in so doing, we want to judge your operational effectiveness in terms of the way you’re delivering service.

The first of the month, we map NPS to revenues and costs, and we can quickly relate financial performance to operational excellence and to delivering new customer service.

Tackling bad profits does not, in our opinion, mean that you are in business to be altruistic. Nor does it mean that every customer has a vote on what should be good or bad profits. Many customers have their own ideas that may not be right for your business. You might personally think that it’s outrageous that your public relations agency charges you a rush fee to amend copy at the last instant, but it may fully reflect the agency’s costs and the increased value that you receive. Instead, bad profits often rely on some form of trap—a business process that is perfectly legal but clearly designed to charge abnormal profits to take advantage of a customer in the short term. The vast majority of customers would recognize this behavior as being bad profits and penalize the organization with lost future business.

Companies that believe in Net Promoter are sensitive to the issue of bad profits and actively find ways, as in the Aggreko case, to safeguard against these types of business practices. It’s often the case that root cause analysis of Net Promoter results will point directly to the underlying source of those bad profits and present a clear business choice of current versus future costs.

Net Promoter: Key Tenets

A successful Net Promoter program includes several factors that work together. Although NPS is useful, the most prevalent cause of failure in Net Promoter programs is the inability of the organization to go beyond the metric and build out a complete operational model with NPS as its