Net promoter score (NPS) first captured the imagination of the C-Suite in the early aughts (2000-2009) due to the customer insights it provided and its simplicity. In a nutshell, it’s a single number that tells companies how satisfied their customers are.
But despite how revolutionary NPS was when it was introduced, the metric has serious limitations when it comes to driving profitable growth. Intrinsically, it assumes all customers are equally valuable to the company. They’re not. The most effective way for CMOs and CFOs to use NPS to guide their growth and drive their stock price is to pair it with customer lifetime value (CLV).
The Brilliance of NPS Is Its Simplicity
NPS is brilliant in its simplicity. As Adam Dorell, the CEO of CustomerGauge and an expert on NPS, recently told me: “Net Promoter Score is asking your customers about how likely they will be to refer the product to a friend on a zero-to-10 scale.” Promoters are those who rate the product or experience a nine or 10; passives a seven to eight; and detractors a zero to six. A company’s NPS is simply the percentage of customers classified as promoters minus the percentage identified as detractors.
Companies that use NPS alone run the risk of then focussing too intently on winning over detractors. Since every investment is a zero-sum, these efforts could end up rewarding a company’s lowest-value customers with enhanced products and experiences at the expense of better serving its highest-value customers.
NPS provides companies with a sense of what their average customer thinks, but some customers deserve more attention than others. As Peter Fader, the Wharton professor who literally wrote the book on these concepts, “Customer Centricity,” explained: these less-profitable customers “will help you keep the lights on,” but they are unlikely to become the future growth engines of a company. “Don’t delude yourself into thinking that you are going to turn those ugly ducklings into beautiful swans. Just learn to live with them in a cost-effective manner,” Fader told me.
Dorrell explained that one way to avoid this trap is to “think of NPS as a process. Not only should you monitor what the average NPS is of a cohort, you should actually track it over time with a particular focus on the customers who are becoming progressively more profitable and more valuable to you — in other words, those who are making more frequent purchases without the need for couponing or concessions and thereby are generating higher profit.”
Related Article: Beware the Customer Experience Metrics Manipulators
Why Customer Lifetime Value Matters
That’s where CLV comes in. CLV measures the value of customers over time by allocating the cost of acquiring them and subtracting a projection of their future profitability. Increases in CLV drive earnings growth and thereby enterprise value. Here is where the digital native companies such as All Birds, Dollar Shave Club and Casper have a jump on their old economy competitors. These companies — either from launch or shortly thereafter — tracked and optimized their spend on every customer across products and platforms while remaining mindful of the projected value of said customers.
Non-digital natives can learn from this approach by subdividing their NPS data into CLV tiers. This process, known as de-averaging, allows marketers to understand their NPS at a more granular level. For instance, they could determine that 25% of their customers comprise as much as 60% to 80% of their overall profitability. They should then give greater weight and pay closer attention to the NPS of this customer cohort when building new products, services and experiences.
We know — thanks to Fred Reichheld, the Bain consultant who popularized NPS 20 years ago — that your best customers can generate the highest return on investment. It costs more to acquire new customers than to capture a greater share of existing customers’ wallets. Simply stated, they already like you best. As Fader put it: “Actions trump words.” When it comes to driving a company’s growth, customer purchase behavior (what they pay and how often they buy) is more important than their responses to a survey question, which leaves NPS “more in the passenger seat than the driver’s seat.”
So while there is certainly a place for NPS in a company’s toolbox, it should not be used in a vacuum. As Fader further explained, “There are going to be customers who buy from you, who interact with you all the time, and it’s tempting to say that they are loyal. It is tempting to say that they will go through the gates of hell to stay with you. But the fact is that in many cases — and more in certain sectors — they are more hostages than loyal customers.” Think public utilities or airlines. At the end of the day, these customers are vulnerable. If a better option comes along, they might jump at it. Their purchase behavior is not commensurate with their satisfaction.
Related Article: Calculating Customer Lifetime Value Is Tricky
The Key to Success? Combining NPS and CLV
Companies need to combine the power and simplicity of NPS and de-average it by CLV cohort so management can avoid investing in products and experiences that may be important — but for customers who are not all that valuable. Conversely, management teams that focus on improving NPS among their highest CLV customers are likely to drive profitable revenue growth, and with it, the holy grail: shareholder value.
Chris Kuenne, founder of Rosetta and Rosemark, is a highly successful entrepreneur, business builder, best-selling author and member of Princeton University’s faculty. For more than 35 years he has been fascinated by the question of what motivates people to act as they do in a commercial context.