August 20, 2019

Forbes – Is Net Promoter Score Just A ‘Feel Good’ Metric?

By Robin Ferracone

There’s an old saying, “What doesn’t get measured, doesn’t get done.” To that end, performance metrics continue to be the cornerstone of pay for performance alignment. Recently there’s been quite a bit of buzz around net promoter score (NPS) to measure how satisfied customers are with the services they are receiving. Since many clients are asking about NPS, I thought it made sense to interview Nancy Smith for this week’s PayWatch blog on Forbes.com. Nancy is President and CEO of Analytic Partners, an independently held company that provides highly customized analytics and consulting services including marketing mix modeling, digital attribution, digital & social ROI, segmentation, loyalty analysis and optimization. These are exciting times and it’s great to have Nancy with us to do a deeper dive on NPS and why companies might consider using it, if at all.

Robin Ferracone:  Nancy, thanks so much for joining me today. I’m sure you saw the recent Wall Street Journal article on “The Dubious Management Fad Sweeping Corporate America.” The concept of Net Promoter Score (NPS) was first introduced in 2003, and I know you and your colleagues at Analytic Partners have been at the forefront bringing insights around NPS to your clients. To get us started, can you briefly explain what NPS is and why has it has become so popular over the past few years?

Nancy Smith: Net Promoter Score (NPS) is a popular benchmark companies use to assess customer satisfaction in a quick, repeatable way. Typically, this is done with one question on a ten-point scale asking how likely the respondent would be to recommend the company, with 9 or 10 considered successful. It can be useful to help understand trends in satisfaction and it’s easy for leaders across an organization to understand, but NPS is just one of many metrics we could work with clients on.

Ferracone: Over my past 20 years in executive compensation and performance advisory, I have seen a lot of trends come and go: for example, Total Quality Management, the Balanced Scorecard and EVA. It seems a number of companies have added NPS to their bonus metrics for employees as well as senior management. Is NPS a metric that is here to stay, or is this merely another passing trend?

Smith: With any metric, the value of the output is only as good as the value of the input. Measurement needs to account for bias, consistency needs to be maintained and NPS needs to be one part of a larger measurement framework. Most importantly, NPS needs to be connected to value – whether that is in the form of sales or shareholder value. If measurement is handled poorly, is unstructured and not validated against results – and if it isn’t connected to real business value – it will quickly fall out of favor.

Ferracone: Thinking about executive compensation and the metrics our team at Farient help companies develop for their long and short-term incentives in executive compensation, how can NPS outcomes be effectively linked to executive compensation?

Smith: We often work with clients to help them understand the benefits of balancing long-and short-term results in terms of optimizing their efforts. It’s too easy to lose track of the bottom line and how efforts today will help drive results in the future. Typically, significant work is needed to connect NPS and a company’s value, and it’s necessary to validate. The connection isn’t something you could claim as a blanket statement. Only if NPS did predict future success would it make sense to link it to compensation. (And then it would need to be continually tested/verified.)

Ferracone: NPS is based on customer feedback. Yet the world in general seems to be suffering from survey fatigue. Several articles and papers have calculated survey responses from customers at less than five percent. Seems like NPS could be a “nice to have” metric, though not a “need to have.” How can it possibly be an accurate representation of customer experience that links customer contribution to profitability?

Smith: You’ve noted a key problem with NPS: it’s based on a snapshot of customer sentiment, based on a likely small sample of people who respond to surveys – and we know that sample tends to skew older. If not approached scientifically, NPS cannot be an accurate representation of customer experience. There will be biases and blind spots.

The principles of good KPIs are important to note here:

  • Consistent in measurement, quality and validation
  • Cannot be tweaked or “gamed”
  • Clear and not up for interpretation
  • Results change over time
  • And most importantly, can be used as an indicator of success

Ferracone: Companies often use NPS on investor calls and in their proxies, but with no stated link between NPS and shareholder value. Why do investors simply accept NPS as a valid metric?

Smith: NPS in many ways is a “feel-good” stat. It’s easy to explain, and as every investor is also a consumer, it’s easy to understand satisfaction. But if the work isn’t done to connect the metric with shareholder value, and if there is no stated link between them, it’s likely because they haven’t modeled it out to prove there is. Investors need to take metrics like NPS with a grain of salt unless they know there is rigor and validation involved.

Ferracone: Nancy, you’ve talked with your clients over the years about the customer experience. Is NPS a reasonable metric? Are there other customer experience metrics that have a greater influence on value than NPS? If so, what are some examples?

Smith: Brand sentiment metrics can be an important part of a holistic measurement framework. It’s important for long term success to understand the health of the brand. NPS can be a factor, if handled correctly. But as with all things in measurement, doing it wrong can often send businesses confidently in the wrong direction.

Ferracone: Thank you for sharing your impactful insights with us. I look forward to keeping in touch.

This post originally appeared on Forbes.com.

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