One of the very best metrics to measure the success of your business—at least in your customers’ eyes—is the Net Promotor Score, also known as NPS. For those who may not know what this is, it is a simple survey question:
On a scale of zero to ten, what is the likelihood you would recommend us to a friend or colleague?
If the customer scores you as a nine or ten, they are a promoter. If they score you as a seven or eight, they are passive—or average. Any score less than a seven is a detractor. The formula to calculate your NPS score is to subtract the percentage of detractors from the percentage of promoters. That number is your score. Pretty simple and basic.
Just how powerful is this question? According to Fortune Magazine, two-thirds of the business world uses NPS to measure the success of the customer experience. Why? The question is simple, but the insight you get is powerful.
Fred Reichheld is the creator of NPS and has written numerous books, the most recent being Winning on Purpose: The Unbeatable Strategy of Loving Customers. I had a chance to interview him on Amazing Business Radio where he shared some of his latest thinking on how to, as the new book title implies, win and love your customers.
According to Reichheld, NPS has been abused and misused. Many companies are using it the wrong way. More than 80% of businesses using NPS disagree with the basic foundational premise, which is that the “primary purpose of a business is to enrich the lives of its customers.” Reichheld and his partners at Bain & Company believe that when you focus on enriching the lives of your customers, you achieve growth, repeat business from customers, happier and fulfilled employees, and ultimately, higher profits.
Proof of this comes in the form of investments in publicly traded companies that have a high NPS. Reichheld took the companies he wrote about in a book ten years ago and invested in them, creating a fund of the companies with the highest NPS. While an oversimplification, the general idea is that Reichheld rebalances the portfolio every year by selling the companies that come up short and buying into new companies with high NPS. The result, ten years later, is a 26% return, triple that of the Vanguard Index, and five times the U.S. median. Reichheld says, “It’s an explosive outperformance!”
Reichheld refers to his investment strategies as the FREDSI, which stands for Foster Recommendation and Eliminate Detraction Stock Index. In case you don’t see it, NPS is all about customers’ willingness to recommend you. So, invest in, as in foster, the companies that customers highly recommend, and sell off, as in eliminate the companies that lose ground or have low NPS, known as detractors.
Almost three years ago I wrote a similar article in Forbes.com about Siegel+Gale’s World’s Simplest Brands report. Similar to Reichheld’s strategy, they invested in the top performing customer-focused brands, but their measurement was based on how simple it was to do business with these companies. Simple means convenient and customers love to do business with convenient companies. They will even pay more for convenience. And the investment return after ten years of managing a “simple” portfolio was a staggering three times more than the DOW or S&P.
Customers love a good experience. They embrace great service and convenience. The companies that make a conscious decision to deliver these advantages are the NPS winners, indicating their customers’ willingness to recommend, which means they are also more likely to keep coming back. That is a strategy for success in business that potentially drives revenue, profits and a higher return in the stock market.
As an investor, it seems like common sense to buy the stock of companies that have customers who love their products and customer experience. Yet you can’t ignore that there are companies out there that are known for their poor customer experience yet somehow do well. Still, accumulating a portfolio of companies that have a high Net Promotor Score seems like a good investment strategy. After all, doesn’t it make sense that, in general, companies that have customers who love them might be more successful than companies that don’t?
IMPORTANT: I’m not a financial advisor. I’m a customer service and experience expert. If you decide to follow Reichheld’s method, you should still consult with a professional.
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