Why NPS Can Be Misleading When It Comes to Customer Due Diligence

Most B2B firms are relationship focused, so why do so many measure customer loyalty on a transactional basis?

While waiting for a recent – and significantly delayed – United flight from Los Angeles to Chicago, I overheard a disgruntled passenger mutter, “I will never fly this airline again” (expletive omitted). Moments later, when Global Services passengers (United’s highest tier of frequent business fliers) were invited to pre-board, he was the first person to step on the plane.

Let’s presume our passenger received an email the day after the flight inviting him to take a customer satisfaction survey. One of the questions in this survey is the Net Promoter Score (NPS) question: “How likely would you be to recommend United to a friend or colleague?” NPS being an industry-standard metric for quantifying customer loyalty. Based on our passenger’s clear dissatisfaction with his latest experience, let’s infer he provided a low rating, perhaps even a “Detractor” rating, a score which would classify our passenger as not being loyal.

Does this mean the passenger is unlikely to fly United again? Of course not. Based on his Global Services status, he flew at least 250,000 miles with the airline last year, and he’s probably going to fly another 250,000 miles this year.

The reason NPS has gained broad adoption is because it has been validated as a reliable predictor of a company’s future growth outlook. To be clear, NPS does not predict absolute growth. If macroeconomic conditions crash, a strong NPS won’t guarantee continued growth. But in many industries, NPS absolutely predicts relative growth. Meaning, companies with a best-in-class NPS tend to outpace the growth rate of their respective industries by a factor of two to three times.

But to be effective, NPS needs to be used appropriately. So, how do you know if NPS is a valid KPI for your business? The answer lies in the type of relationship you have with your customers.

In fast-moving, highly transactional industries, NPS is rarely a valuable metric. Most B2C firms, for instance, find NPS is not predictive because consumer preferences and behaviors are constantly shifting given the abundance of choice and marketing communications. However, in relationship-driven businesses, NPS tends to be highly predictive. The problem is many of these firms — most of which are B2B — still measure NPS on a transactional rather than relationship basis.

As Cornell professor Thomas Gilovich wrote, “we are the sum total of our experiences.” The same sentiment applies to B2B relationships since no single touchpoint defines the customer experience. Therefore, a more holistic approach to measuring loyalty is necessary in order to generate meaningful and predictive insights. Efforts which consider NPS alone (transaction-triggered web surveys, for example) are bound to fail because they oversimply the nature of customer relationships.

A better alternative is the Voice of the Customer (VOC) methodology. VOC uses NPS, but doesn’t rely on NPS alone. Several other quantitative and qualitative variables such as product/service performance, satisfaction with account support, competitive benchmarking, unmet needs and pain points, future spend outlook, etc. are also gathered in order to tell a much more holistic and actionable story. In other words, the sum total of the customer experience is considered prior to determining customer loyalty.

Going back to the United example, if we asked the NPS question in a broader context (and not pegged to the latest experience), we would likely get very different results. In a VOC setting, our passenger might actually give a “Promoter” rating, and would mention non-transactional elements of the relationship that contribute to his loyalty: the airport closest to my home is a United hub; I want to maintain my MileagePlus status; I get triple miles when I book using by co-branded credit card, etc.

Another example: niche software-as-a-service firms. Quite often, we see customers submit low scores on the NPS scale, but they are actually quite sticky. Non-transactional forces are at play: switching costs are high; there are no substitute offerings available; retraining results in lost productivity, etc.

NPS is not perfect. The truth is that no single measurement is, especially when it comes to something as nuanced as customer loyalty. But the question shouldn’t be “is NPS predictive or not”; the question should be: Is NPS alone right for my business, or do I need to truly understand the Voice of the Customer?

For more information on how to utilize the Voice of the Customer to mitigate customer concentration risk and accelerate value creation, visit strategex.com/customerdiligence.