OBSERVATIONS FROM THE FINTECH SNARK TANK
The Net Promoter Score (NPS)—the biggest example of management snake oil ever created—has finally run its course.
An article titled Net Promoter Score 3.0 in the Harvard Business Review asserts:
“Self-reported scores and misinterpretations of the NPS framework have sown confusion and diminished its credibility.”
Try not to laugh too hard at that joke of a statement. The self-reporting of scores helped create the metric’s popularity, and the weaknesses inherent in the score’s methodology rightfully diminished the metric’s credibility.
In a May 2019 Fintech Snark Tank article, I outlined some of those weaknesses, explaining that the Net Promoter Score:
- Doesn’t explain why a customer would recommend the firm. Let’s say a bank finds out that 10% of its branches score much higher than the average on the NPS and that 10% score much lower. What has it learned? Nothing. You might argue that it provides clues as to where to dig in…but wouldn’t it be more useful to find out the root causes in the first place?
- Doesn’t take into account customer demographics. Younger consumers typically refer products and services they like more often than older consumers do. So if a company\’s NPS increases from one year to the next, was it because the firm improved its products and services and/or service delivery, or did it simply reflect an underlying change in the demographics of its customer base?
- Incentivizes undesirable behavior. One exec told me about an interaction he had picking up his car at a car dealer’s repair shop. The shop manager told him, “if there’s any reason you wouldn’t check off the ‘likely to recommend’ box on the customer satisfaction survey, please let me know before filling out the survey.” Do you want your firm’s personnel asking customers to say they’d refer the firm to friends and family—or doing the things that earn a referral?
While the points above should have been enough to banish NPS from the slate of management metrics, there’s another important reason for retiring the score:
It measures intention, not behavior.
What should companies measure, then, if the not intention to refer?
In 2012, I proposed the Referral Performance Score, calculated by measuring the actual percentage of a firm’s customers that provide referrals and the percentage of customers that grow their relationship with the company.
New Metrics to Replace the Net Promoter Score
The folks at Bain have finally capitulated:
“We realized that the only way to make the system work better was to develop a complementary metric that drew on accounting results, not on surveys.”
Duh. Actually, the only way to make the system work better is to throwaway the existing NPS score and start all over. Which is what they did:
“We needed [a metric] that would illuminate the quality (and the likely profitability) of a firm’s growth. It had to be based on audited revenues from all customers, not just on a potentially biased sample of survey responses, so that it would be far more resistant to gaming, coaching, pleading, and the response biases that plague the results of non-anonymized surveys.”
Oh, you mean, like the Referral Performance Score?
The Bain brains have come up with a “new” metric they call the Earned Growth Rate, which, according to the article, “measures the revenue growth generated by returning customers and their referrals.”
Bain goes on to recommend the calculation of two additional metrics:
- Net revenue retention (NRR). Already used in some industries, NRR is calculated by counting current period (e.g., month, quarter, year) revenue from existing customers and dividing by the prior period’s total revenues.
- Earned new customers (ENC). ENC is the percentage of spending from new customers acquired through referrals (in contrast to customers who come on board as a result of advertising or other promotional efforts).
The inspiration for this metric was an investor presentation slide from First Republic Bank which had “quantified how much of its growth resulted from customers’ coming back for more—and bringing their friends.”
According to the HBR article:
“The bank has data on referrals because it asks each new customer about the primary reason for selecting the bank and records the answer in the customer’s file.”
And therein lies the rub.
With either the RPS or Earned Growth Rate, a company must track referrals, which is not an easy task, nor is it expense-free. Just as providers rushed into the market to provide a Net Promoter survey capability for brands, expect a flurry of providers offering new “referral tracking” services to help calculate Earned Growth.
The Death of the Net Promoter Score
Overall, there are four conclusions to draw here:
- The Net Promoter Score is dead. Bain attempts to paint Earned Growth as “Net Promoter 3.0” but the proposed methodology moves away from the pointless 10-point scale associated with asking customers about their intention to refer.
- Behavior trumps intention. The new metrics reflect something many of us have said for years: The only thing that matters is actual behavior (and results). Can you imagine a salesperson going to her boss and saying “I intended to make a lot more sales this year, so you should pay me based on what I intended to sell”?
- There are no “silver bullet” metrics. For years, proponents of the NPS have heralded the metric as the “one number to know” and the ease with which the metric can be measured. The real world isn’t that simple. Boiling complicated organizations down to a single metric—let alone one as flawed as the NPS—just doesn’t work. Executives looking for easy fixes should be fired.
- Earned growth will catch on—in some industries. Bain is a leading and influential consulting firm, and as a result, many companies will experiment with and adopt the new Earned Growth metric. But because it relies on tracking actual referral and customer revenue activity, not all companies will find it practical to implement. After all, I love the brand of cereal I eat each morning, and refer it to anyone crazy enough to listen to me, but I don’t see how Quaker Oats will ever figure out how much I spend on their cereal or how many people I refer their product to.