One number that says it all
This blog post originally appeared on LinkedIn.
Analysts use many yardsticks to predict the direction of a company’s stock price—price-to-earnings ratios, dividend payout ratios, EBITDA and so on. Some are so complicated: Try calculating a company’s weighted average cost of capital—or better yet its EVA (economic value added) on the back of an envelope.
Without a doubt, these measures have their place. But these figures tend to look backward at a company’s performance, tallied weeks after the period has ended. And they provide little practical advice to help employees improve. It’s merely complicated data on a spreadsheet.
Horace Dediu captured the limitations of traditional financial measures in a blog post on LinkedIn. He makes the case that the value of a company’s customer base and its loyalty can serve as proxies for gauging the quality of the company’s staff, work practices and overall “vision.” I couldn’t agree more.
When we developed the Net Promoter Score, the goal was to cut through the numbers noise and provide a truly useful metric for companies. Its power would lie in its ability to improve service quickly as part of a larger system of real-time feedback and training. However, the Net Promoter Score achieves several aims at once: Not only does it provide a simple metric to guide employees and managers, it offers a useful performance gauge for investors.
- A company’s Net Promoter Score indicates whether it’s winning with customers. A company with a high Net Promoter Score relative to key competitors usually grows faster and more profitably. The competitive advantage of having a higher percentage of promoters than detractors is tough to beat. Promoters defect at lower rates than other customers. They also spend more over time and cost less to serve.
- Companies that use NPS often create the right products. That’s because they know their customers better. They seek client feedback and respond with products suited to customers’ needs. In The Ultimate Question 2.0, my colleague Rob Markey and I discussed how low Net Promoter scores exposed design flaws in Logitech’s MX 5000 keyboard and mouse. Logitech listened to customer criticisms and improved its next model.
- NPS leaders have the most powerful marketing tool: positive word of mouth. All the advertising in the world can’t overcome a bad image spawned by customer detractors. But when a company does right by its customers, word spreads fast—and in most companies, new customers generated through referral expand purchases quickly and tend to stay longer than new customers generated through any other means.
As more companies cite their Net Promoter Score as a sign of improvement in investor presentations and earnings reports, I’m heartened that we succeeded in creating a useful measure for executives, employees and investors alike.
In this video, Rob and I discuss the power of using one number to evaluate service quality: