Fred Reichheld is a Bain & Company Senior Advisor and the Creator of the Net Promoter System.
It’s been touted as the “one number a business needs to grow”. A number based on asking just one survey question – the so-called “Ultimate Question”: “How likely are you to recommend our brand to a friend or colleague?”.
Since it was first introduced in a 2003 Harvard Business Review article by Fred Reichheld, head of Bain & Company’s loyalty practice at that time, the Net Promoter Score has become a beacon metric in two-thirds of Fortune 500 companies. It has now been adopted by organizations of all sizes and types to measure customer sentiment. The rationale behind it is simple: If customers feel strongly enough about a brand to recommend it, that should lead to revenue growth. And past studies by Bain have shown that it can be a great predictor of business performance.
The strength of NPS has always been its simplicity. By subtracting the percentage of “detractors” from the percentage of “promoters”, while ignoring the “passives”, the net score is easy to calculate and understand. The more net promoters you have, the more likely you are to have a strong base of loyalists whose value is likely to increase over time. But what’s really helped make NPS a popular metric is that the formula is non-proprietary, free to anyone who wishes to use it. That’s enabled it to become a benchmark score in just about every industry where customer loyalty matters, allowing organizations to easily compare themselves to their competition.
Companies renowned for putting customers first, like Apple, Costco, USAA, Amazon, and Intuit regularly earn top scores of 50 or more, while less admired companies like wireless service providers and insurers are usually punished with single-digit negative scores. That fact alone suggests a correlation between customer experience and market success.
Or does it?
NPS has its own share of detractors. In fact, Gartner predicts that more than 75% of organizations will abandon NPS as a measure of success for customer service by 2025. The reason: it fails to provide sufficient diagnostic insight into why customers feel the way they do (even though there is often an open-ended follow-up question asking respondents to explain the reason for their rating).
Critics quibble with the arbitrary nature of the scoring methodology – some say the results tend to be “too noisy” – others raise the question of correlation versus causation. And the NPS system is prone to gamesmanship when it’s managed in-house and not by a neutral 3rd party.
Yet all of these critics are missing the point: the true value of NPS is that it has put the question of loyalty on the radar of many business leaders who might otherwise be obsessed with the short-term stock price. The real payoff of adopting NPS is not the score it generates – it’s the influence it has on the customer-first orientation of companies. Within the span of 20 years, NPS has achieved what customer satisfaction surveys could never do: make customer experience a strategic priority for executive management.
In his latest book “Winning on Purpose” Fred Reichheld distills his 44 years of experience as a loyalty guru into a manifesto and set of “Golden Rule” operating principles. The purpose of a business, he declares, is not to maximize profits – it’s to maximize the happiness of customers – to “enrich their lives”. This worldview is a natural progression from his 1996 landmark book, “The Loyalty Effect” which made the economic case for focusing on customers.
I started by asking Fred how he would compare the loyalty landscape of that period to now.
Fred Reichheld: On many dimensions, I don’t think the world has come very far in appreciating the importance of loyalty. We’ve made some important progress for sure. And the notion of keeping your customers happy enough and that this huge economic advantage of earning the loyalty of customers … but sort of manipulating customers is just as good as any other way if it’s legal and that’s not the nature of… the foundation of my thinking was if you treat people right, enrich their lives, in a sustainable way, of course, you know, you have to be sustainable, profitable, you can’t turn into a slavish servant for someone, it has to be an appropriate relationship. But with that constraint, the more you can invest in making someone else’s life better, the better the world gets. And I don’t think most people still see business in that light. The stakeholders, and maybe it’s maximized shareholder value, maybe it’s not, although since all the control systems and measurement systems and governance and compensation are all based on accounting, the accountants’ mindset dominates no matter what people say about stakeholders in my opinion, and accountants’ mindset has a bottom line – profits. And therefore you maximize profits and the constraints of taking, you know, customers, employees, and so forth. You have to be good enough – that’s satisfaction language – but I think those who focus on the customer and enriching lives as their focal point – that’s where you get great businesses.
Stephen Shaw: Well, and your book is populated with some pretty outstanding examples of companies who have adopted that mindset. So there’s a number of areas we’re gonna explore in the course of this interview. Certainly what you’re touching upon – the idea of stakeholder capitalism, brand purpose, etc – I do wanna ask you something though. I mean, it was apparent in rereading parts of the “Loyalty Effect” that the approach you took very much in that book was really from an economic standpoint. And one of your oft-quoted statements is the 5/25 ratio of retention to profitability, and it’s become conventional wisdom. But in your new book, you seem to make more of a plea for business leaders – and I think you were just referencing this – to take the moral high ground – to practice this “golden rule”. Why the switch in emphasis? If you’re presenting this economic case in “The Loyalty Effect” – and not enough companies are still adopting the concept, that it’s hard – why did you put the emphasis on the morality of this, in this current book?