A conversation with Fred Reichheld:
What is NPS?
NPS is management
philosophy based on the idea that the best way to grow is to convert more customers
into promoters and fewer into detractors. NPS is also the central metric and related tools and business processes—that make
this philosophy practical and operational. NPS stands for Net Promoter Score. Just as net
worth represents the difference between financial assets and liabilities, Net
Promoter quantifies the difference between customer assets and liabilities. With
one question, customers can be sorted into three categories: Promoters who are loyal and enthusiastic;
Passives who are satisfied but
unenthusiastic; and Detractors who are unhappy but
trapped in a bad relationship. Quite simply, you
calculate the NPS score by applying the formula P — D =
NPS, where P and D are the percentage
of promoters and detractors. The (not at all simple) challenge for organizations
is to improve their growth by managing improvements in their Net Promoter Scores.
Is there a correlation between
NPS and growth in a company?
Yes! In a 2003 study based on
more than 150,000 customers, we found a very strong correlation between Net
Promoter Scores and a company's growth relative to its competitors. From the
airline industry, to retail banks, to delivery services, to personal computers,
firms with the best NPS demonstrated superior growth. Companies that have achieved sustainable growth
over a ten year period have double the NPS of others.
What companies are already utilizing NPS?
NPS has begun to spread like wildfire. Jeff Immelt, CEO of General Electric, has
announced that NPS will be deployed across all 500+ GE business lines—and will
drive executive bonuses. Other firms who have adopted NPS include Intuit,
American Express, MSN, Schwab, Thermo-Electron, and many others spanning both
the consumer and business-to-business sectors.
Can high NPS scores translate to greater economic success? What are some examples?
While NPS scores
in and of themselves do not guarantee profitable growth, high scores are
a strong predictor of economic success. HomeBanc, a mortgage company in Atlanta,
has a whopping NPS of 84%. As might be expected from this
score, HomeBanc's productivity levels average 60 percent higher than industry standards. The firm's growth exceeded 25% each
year for the past decade—more than doubling the industry rate.
Why does NPS work?
Promoters and detractors behave
differently and generate fundamentally different economic consequences for the
firm. While today's accounting systems camouflage this fact, the best way to
profitably grow is to get more promoters and fewer detractors. The
benefits of promoters include higher retention rates, higher cross-sell rates,
constructive feedback, cost efficiencies, and most important of all, they are
the source of highly crucial word-of-mouth that drives corporate reputations
and customer referrals.
You talk about good and bad
profits. How can any profit be considered bad?
Consider those resentful overage
and usage fees from your cell phone supplier, or those plans that manipulate
you into buying more minutes than you need. These practices generate bad
profits. Whenever a customer feels deceived, coerced, or disrespected, then
earnings from that customer are bad—they come at the customer's expense. Bad
profits convert customers into detractors who blacken a firm's reputation and choke
off a company's best opportunity for true growth, the kind of growth that is
both profitable and sustainable. The pursuit of bad profits alienates customers
and demoralizes employees. Good profits come from satisfied customers who not
only provide repeat business but bring new customers to the company.
What is probably the most crucial factor in a company's economic success? Why?
Word-of-mouth has much more power
in today's economy than one might think. Word-of-mouth works both ways:
detractors spread negative word-of-mouth and cause people to turn away, while
conversely, promoters spread positive word-of-mouth and bring new people in the
door. Promoters account for more than 80% of positive referrals—and only
promoters can build great brands and corporate reputations.
What are some of the ways bad profits undermine growth?
Bad profits create customers who feel
disgruntled by their experience with a company. Often, these customers find
ways to get even in ways that hurt a company's growth. For instance, detractors
drive up service costs by reporting numerous problems, demoralize employees
with complaints and demands, and gripe to friends, acquaintances, colleagues
and relatives. All of these will have a negative effect on a company's
economic success, illustrating why bad profits are so destructive. The
average firm today has turned 33% of its customers into detractors—some firms
exceed 50% detractors! The average
NPS is less than 10%.The quest for
profitable growth becomes a near-hopeless struggle when firms have almost as
many detractors as promoters.