Using NPS to predict growth

Net Promoter Score (NPS) is often called “The One Number You Need to Grow”. This is false. But it can predict growth if you survey all your potential customers and track its changes over time.

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📝 Intro

Net Promoter Score (NPS) is a widely used metric. 

Companies use it to measure both immediate satisfaction with an experience (e.g. after an interaction with customer service), and brand attitudes over time (e.g. how they change quarter by quarter).

NPS is based on one question: “How likely is it, from 0 to 10, that you would recommend [company X] to a friend or colleague?

People who answer 10 or 9 are considered ‘promoters’, 8 or 7 are ‘passives’, and 6 to 0 are ‘detractors’. The score is calculated by subtracting the proportion of detractors from that of promoters (here’s an easy, visual calculator).

When Fred Reichheld (Bain & Company) introduced NPS in a Harvard Business Review article in 2003. He called it “The One Number You Need to Grow”.

That’s not what the evidence shows.

For the past 18 years, scientists all over the world have tried to replicate Reichheld’s conclusion and looked for evidence to back it up.

At best, some studies found that NPS is as good as other commonly used and evidence-based metrics (e.g. customer satisfaction). At worst, they found no evidence that good NPS is linked to growth.

Yet, companies keep using NPS. Perhaps because everyone else uses it and it’s simple and intuitive. But it’s likely that at least some companies have found a useful and reliable way to use it.

Today’s study shows us when that is. NPS does predict sales, but only if you use it correctly.

Here’s how.

P.S.: The NPS debate that rages in the scientific community is a great example of the beautiful process of academic research.

Scores of researchers have spent almost two decades uncovering new evidence, crunching data, debating, and - often - tearing each other apart, to understand whether NPS is or isn’t useful.

During this process, each study inched us towards a true understanding of it (which of course isn’t complete, and likely never will be).

Thanks to this, today we have real evidence of when we should use NPS, and we don’t have to rely on biased advice.

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Previous tip: The Amazon effect (All tips here)

NPS predicts short-term sales growth if it measures all potential customers

Impacted metrics: Brand attitudes
Channels: Marketing metrics | KPIs | Analytics
For: Mostly B2C
Research date: July 2021

📈 Recommendation

To use Net Promoter Score (NPS) to track your performance:

  1. Regularly survey a sample of all your potential customers, not only your current customers (e.g. you can purchase the data from a market research firm)

  2. Measure the short-term changes in your score (e.g. monthly, quarterly). Your overall ‘static’ NPS score doesn’t matter in predicting growth.

If your NPS increases, your short-term sales will likely increase (e.g. the next quarter). 

If it doesn’t grow or it decreases, use it as an advance ‘general health’ warning bell that you should investigate.

Having a high (static) NPS or surveying only your current customers does not reliably predict growth.

🎓 Effects

  • The Net Promoter Score (NPS) is a widely used marketing metric. Managers and consultants that promote NPS call it the “One Metric You Need [to focus on improving] to Grow”.

  • Several previous studies found no evidence that a company’s NPS predicts sales growth. Other studies found that it does, but no better than other typical metrics (e.g. customer satisfaction). However, all these studies measured only the NPS of current customers (e.g. asked after a purchase).

  • This study found that growth in NPS based on all potential customers (including past customers, and potential new ones) predicts short-term sales increases (e.g. in the next month or quarter).

  • An analysis of 193,220 NPS evaluations and sales over 5 years of 7 of the biggest US sports brands, found that:

    • A one point increase in NPS predicted a 1.46% increase in sales the next quarter

    • Changes in NPS did not predict sales over a longer period of time (e.g. a year)

    • The absolute number of NPS (e.g. whether it’s high or low by industry standards) did not predict sales growth

    • NPS is as good at predicting sales as a brand consideration metric

  • Therefore, changes in NPS are best used as a ‘brand health’ metric (if it increases you are doing well, if it decreases you have a problem).

  • NPS is likely best used for products that are bought relatively frequently and have an emotional involvement (e.g. fashion, food).

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🧠 Why it works

  • NPS is a popular metric because it’s simple to measure and intuitive. Proponents say that “How likely are you to recommend [company X]?” is a good question to ask because it shows how willing someone is to ‘put themselves on the line’ to recommend the company to others.

  • It appears that Fred Reichheld, who first proposed NPS in 2003, surveyed customers who were familiar with a brand in his research, not only current customers. On the other hand, follow-up studies focused on scores from current customers only. So it appears that some of his claims are correct, although exaggerated.

✋ Limitations

  • This study did not analyze the usefulness of NPS to measure the quality of immediate customer experiences (e.g. an interaction with customer service). On average, previous studies suggest it’s a valid metric to use in that context.

  • The analysis focused on a single industry (sports apparel) in one country (US). The results should generalize to similar categories (products bought relatively often and with an emotional involvement). Be extra careful when generalizing them to other categories.

  • We don’t know from this research whether the sales growth predicted by NPS tends to be profitable (Reichheld claimed that NPS leads to profitable growth).

🏢 Companies using this

  • More than two-thirds of Fortune 1,000 companies across most industries use NPS

  • High profile companies such as Apple, Best Buy, Delta Airlines, and GE currently use NPS as a core marketing metric. They even communicate it in earning reports to investors.

  • Measuring NPS for all potential customers (both current and non-customers) is common practice among larger companies. This is what consultancies advise is the best approach in order to use it for decision making and competitive benchmarking.

  • Companies tend to use NPS for current customers as a metric for customer loyalty, while results from all potential customers (including ex-customers, who tend to have negative attitudes) are a measure of brand health.

⚡ Steps to implement

  • Regularly measure how a sample of your potential customers rates you using NPS. Do this once per quarter or more often.

  • Make sure to ask people how they rate your brand in a blind survey which also includes other brands. Otherwise, your answers will be biased. It’s usually easier to buy this data from a market research firm that does this regularly at scale.

  • Monitor your changes in NPS. If it increases, expect an increase in sales. If it decreases, use it as an alarm bell that there’s a problem you need to investigate.

🔍 Study type

Market observation (analysis of 193,220 NPS evaluations and sales growth over five years of the seven of the biggest US sportswear brands). United States

📖 Research

Baehre, S., O’Dwyer, M., O’Malley, L., & Lee, N. (July 2021). The use of Net Promoter Score (NPS) to predict sales growth: insights from an empirical investigation. Journal of the Academy of Marketing Science.

[Link to paper]

🏫 Affiliations

Kemmy Business School, University of Limerick and Warwick Business School, University of Warwick. Ireland and United Kingdom

Remember: Because of the groundbreaking nature of this research, it could be disproven in the future (although this is rare). It also may not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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