Will NPS 3.0 solve Net Promoter Score’s shortcomings?by
In order to address the misuse of NPS and restore its reputation, a new complementary metric has been developed. What are the first impressions of NPS 3.0?
There is no metric quite as divisive as the Net Promoter Score (NPS). As Maurice Fitzgerald noted last year: “Right from the very beginning, right from when Fred Reichheld published his HBR article The One Number You Need to Grow, the subject of the relationship between NPS and revenue has been a controversial one.”
Yes it’s fair to say that NPS has its fair share of detractors and raving fans. And even though there are many that believe it is misleading, a brief scan through applications to MyCustomer’s annual CX Leader of the Year reveals that NPS is commonly used by those in the customer experience profession.
However, at the end of last year Reichheld returned to the Harvard Business Review once again with some surprising news.
In the article - titled Net Promoter 3.0: A better system for understanding the real value of happy customers - Reichheld and fellow Bain & Company partners Darci Darnell and Maureen Burns conceded that the credibility of the NPS framework had diminished over time, harmed by self-reported scores and misrepresentations that had sown confusion.
They wrote: “Many firms amplify the problem by publicly reporting their scores to investors with no explanation of the process used to generate them and no safeguards to prevent pleading (“I’ll lose my job if you don’t rate me a 10”), bribery (“We’ll give you free oil changes for a 10”), and manipulation (“We never send surveys to customers whose claim was denied”).
“No details are provided about which customers (and how many) were surveyed, their response rates, or whether the survey was triggered by a specific transaction. Reports rarely mention whether the research was performed by a reliable third-party expert using double-blind methodology. In other words, some firms have turned Net Promoter Scores into vanity statistics that damage the credibility of NPS.”
It was a dramatic admission. But it served to tee up Reichheld’s big announcement - that in order to address the misuse of NPS, a new complementary metric had been developed. This metric - called 'earned growth' - is reached by combining two other metrics: net recurring revenue and earned new customers.
Drawing on accounting results, rather than surveys, 'earned growth rate' is designed to “reinforce the effectiveness of NPS, providing firms with a clear, data-driven connection between customer success, repeat and expanded purchases, word-of-mouth recommendations, a positive company culture, and business results.”
So will it work?
The pros and cons of NPS
First of all, let’s wind the conversation back a step. Did NPS really need fixing in the first place? After all, while it had its share of detractors, it was also still a highly popular metric.
“There is no question the concept of NPS was excellent,” suggests Simon Thorpe, EMEA solutions director at Pega. “Its simplicity has helped improve the profile and importance of customer service and customer experience across the globe with the majority of organisations adopting it as a key performance measure.
“However, two fundamental issues remain. Firstly, most companies have failed to establish a quantifiable link between an NPS improvement and an increase in financial targets such as - share of wallet, cost per customer and average order value. The lack of evidence has resulted in organisations paying lip service to the value of NPS and have subsequently failed to invest in real CX transformation.
“And secondly, NPS is merely a score, an indicator of customer experience sentiment. Measured alone without real action, leadership, and a desire to change effectively makes the metric redundant.”
Charlene Charity, head of strategy at Digitas, says: “The key flaw is that NPS doesn’t enable businesses to predict loyalty. NPS does not indicate longer-term financial contribution or loyalty levers such as repeat purchase and intent. There are many brands that customers have rated highly from an NPS perspective but after an unrelated negative experience have changed my mind, or have just forgotten about the brand and moved on.”
Jason VandeBoom, founder and CEO at ActiveCampaign, adds: “Many businesses will believe they are accurately monitoring the customer experience because they know their net promoter scores and churn rates. But these data points are too simplified, or detached from the actual customer experience to tell businesses anything meaningful. They’re not actionable in a way that motivates the business or makes a difference to each individual customer journey.”
Yet despite these criticisms, author and blogger Maurice Fitzgerald - former manager of the Net Promoter System Forum on LinkedIn - believes that NPS continues to be the best customer loyalty metric that exists.
“While all customer satisfaction metrics can be misused, as Fred, Darci and Maureen's new HBR article points out, NPS retains certain benefits. The top benefit is that it is simple and its definition is well understood. This is not the case for CSAT, for example, where there is no standard for what constitutes a ’satisfied’ customer.
“When used at an overall brand level, or at an overall customer level for large B2B customers, it is an excellent predictor of retention. It does not predict much of anything when used any other way. And like all other metrics, it provides no indication of what you need to do.”
Nonetheless, as Reichheld, Darnell and Burns acknowledge in their article, in order to make NPS more resistant to “gaming, coaching, pleading, and the response biases that plague the results of non-anonymised surveys” there was a need to make the system work better, and that - they decided was to develop a complementary metric.
This new metric - earned growth - is described as being based on audited revenues from all customers, rather than just on a potentially biased sample of survey responses. And its creators pledge that it will “reinforce the effectiveness of NPS, providing firms with a clear, data-driven connection between customer success, repeat and expanded purchases, word-of-mouth recommendations, a positive company culture, and business results.”
So what are the first impressions of this new metric?
The pros and cons of earned growth
“Personally, I believe it makes the current NPS situation worse,” says Fitzgerald. “The proposal is to add two additional ‘meta metrics’ (my terminology), neither of which has an accepted standard definition or measurement method. This lack of a standard is not the main issue, however.
“The main issue is that neither Net Recurring Revenue nor Earned New Customers provide any information about what actions a company needs to take to improve customer retention, upselling, and cross-selling. I would also suggest that their proposed requirement that companies introduce customer-specific accounting will be really expensive for companies to implement, and close to impossible for companies that grow by M&A.
“In short, I have grown to hate meta metrics that are presented without any mention of the operational actions that need to be taken. Going from one of them to three of them makes this worse, not better.”
But there are also favourable reactions to the announcement.
"The introduction of ‘earned growth’ as part of the Net Promoter 3.0 has highlighted the importance of leaning into the data to truly understand the impact happy and loyal customers bring to a brand’s revenue,” says Charlie Casey, CEO and co-founder of LoyaltyLion.
Some companies will struggle to generate the required data to make the required linkage and a minority will continue to choose the easier route of chasing and then promoting the NPS score purely for PR value.
"Net Promoter 3.0 will let brands fully understand how their customers feel by linking up NPS ratings with repeat purchases and revenue from referrals. Off the back of this, they’ll be able to make data-driven decisions for how to better retain customers and drive up their lifetime value.”
Simon Thorpe applauds the intention to evolve NPS to include quantifiable financial improvement and growth. “If measured correctly this could finally convince the board room of the importance of CX and trigger a refocus and reinvestment,” he says.
However, he also notes that there is a lot of complexity involved. “Some companies will struggle to generate the required data to make the required linkage and a minority will continue to choose the easier route of chasing and then promoting the NPS score purely for PR value,” he predicts.
Charlene Charity, however, is optimistic that the new metric could become extremely valuable. “Once organisations have got the analytical capability and right martech solutions behind them to track, cross reference and analyse the data, I think Earned Growth Rate will become a key metric. It will help businesses identify the right levers, invest in the right areas and track the ongoing effectiveness of their work.”
So will “NPS 3.0” restore the reputation of Net Promoter Score? The jury is out. But Jason VandeBoom reminds us that even if the more optimistic responses to the new metric are correct, it should still not be “the one number you need”.
“The new NPS metric certainly sounds like it’s trying to address what is missing by adding more colour and depth to the data. However, the customer experience, by its very nature, is not linear. It’s the by-product of so many touchpoints across sales, marketing and customer support, and channels like email, social and chat. By only relying on high-level metrics from one source, you’ll always be missing one part of the puzzle. There isn’t a one-size fits all approach to customer experience and that’s why NPS will always be a valuable metric, but only when used in conjunction with other, qualitative metrics too.”
Neil Davey is the managing editor of MyCustomer. An experienced business journalist and editor, Neil has worked on a variety of newspapers, magazines and websites over the past 20 years, including Internet Works, CXO magazine and Business Management. He joined MyCustomer in 2007.