OBSERVATIONS FROM THE FINTECH SNARK TANK
Well, it's about time!
About time that someone has realized that American businesses' favorite metric, the Net Promoter Score (NPS), is nothing more than management snake oil, that is.
A few key points from a Wall Street Journal article titled The Dubious Management Fad Sweeping Corporate America include:
- According to a Wall Street Journal analysis, “net promoter” or “NPS” was cited more than 150 times in earnings conference calls by 50 S&P 500 companies in 2018. Of all the mentions the Journal tracked, no company ever said its NPS declined.
- In reference to the fact that companies use NPS to determine bonuses, the metric's creator, Bain's Fred Reichheld, said "That’s completely bogus.”
- Bain defended the metric, claiming it's "simple to communicate to employees, provides an easy way to follow up with customers and can be used to benchmark against rivals."
- The article's authors write "the results are easy to manipulate, whether intentionally or unintentionally. Some [companies] said they remind only the happiest customers to take the survey."
Problems With the Net Promoter Score
It's mind-boggling that so many companies would rely on the Net Promoter Score as a key management metric when you consider that the score:
- Doesn’t explain why a customer would recommend the firm. Let’s say a bank finds out that 10% of its branches score much higher than the average on the NPS and that 10% score much lower. What has it learned? Nothing. You might argue that it provides clues as to where to dig in…but wouldn’t it be more useful to find out the root causes in the first place?
- Doesn’t take into account consumer demographics. Younger consumers typically refer products and services they like more often than older consumers do. So if a company's NPS increases from one year to the next, was it because the firm improved its products and services and/or service delivery, or did it simply reflect an underlying change in the demographics of its customer base?
- Can incentivize undesirable behavior. One exec told me about an interaction he had picking up his car at the dealer’s repair shop. The shop manager told him, “if there’s any reason you wouldn’t check off the ‘likely to recommend’ box on the customer satisfaction survey, please let me know before filling out the survey.” Do you want your firm’s personnel asking customers to say they’d refer the firm to friends and family—or doing the things that earn a referral?
The One Reason Why You Should Retire the Net Promoter Score
The points above should be enough to banish NPS from the slate of metrics management uses. But there's an even better argument for retiring Net Promoter Score:
It measures intention, not behavior.
It's 2019. Do you think Google, Facebook, and Apple are collecting attitudinal data and inferring behavior from it? Of course not--they collect behavioral data and infer attitudes from it.
That companies use NPS to determine bonuses is mind-boggingly stupid. Using the logic of the NPS, my boss should have given me a huge bonus last year because my intention--on a scale of 1 to 10--to bring in a lot of sales was a "10." Pay no attention to the fact I fell way short of the goal--my intention was there.
The Disconnect Between Intentions and Behavior in Banking
Bain may be correct that the NPS can be used to benchmark an organization against its competition, but finding competitors' scores isn't that easy (unless, of course, you buy into the "system").
But numbers do show up publicly from time to time. Reported NPS vary widely by source, but for the purposes of this analysis, let's use the Net Promoter Scores published by the Temkin Group--they're more complimentary to the banks than other sources.
According to Temkin Research, USAA leads the banking industry with an NPS of 56, followed by credit unions with an NPS of 53 (let's ignore the fact that there are more than 5,500 credit unions in the US). Among the largest banks, JPMorgan Chase has the best NPS with a score of 31, and Citibank the worst, with an NPS of -8.
So what should we conclude from this? Is USAA three times better than Bank of America or Capital One? If so, better at what? If the Net Promoter Score was a meaningful and useful metric, it should predict actual consumer behavior.
In a recent study, Cornerstone Advisors asked consumers who their primary bank was, how many of their friends and family they referred to that institution, and how many new products they added with that institution in the prior year.
The result: NPS is a terrible predictor of behavior in banking.
Although Bank of America's NPS is only a third of USAA's, the same percentage of the two firm's customers expanded their relationship by adding non-deposit products.
And although Capital One's NPS is only a third of USAA's, a slightly higher percentage of Cap One's customers said they referred family and friends than USAA's members did.
All this, despite the good intentions of USAA's members.
Create Your Firm's Rap Sheet
The underlying premise of the NPS metric is that referral intention is an important attribute or trait of a loyal customer. The focus on NPS was worthwhile from the perspective of getting executives to just look at purchase behavior.
After all, in many industries (and especially in banking), consumers don't have a need to get a new product (or service) every week, month, or even year. But loyal customers can do more than just stick around--they can promote the company.
But intention to refer is not the same as actual behavior. The mechanisms for tracking actual referral behavior is available (many firms actually do).
Banks need to replace the Net Promoter Score with a RAP Sheet (Referral and Purchase Sheet, get it?) that lists the percentage of customers that provided referrals during the time period, and what percentage of customers added new products (or expanded their relationship).
The RAP Score is simply the percentage of customers referring times 100 plus the percentage of customers adding products times 100, all divided by two (if 100% of customers referred and added products, the RAP Score would be 100).
Do the same analyses as you would with the NPS--look at how various customer segments compare to each other, and how different parts of the organization compare.
Over time, expand the RAP Sheet to include more detailed levels of referral and purchase behavior--i.e., how many referrals did customers provide, and how many new products or services did they add.
And feel free to use the RAP Score to determine bonuses. If Mr. Reichheld thinks that's "bogus," I'd be happy to debate him on the topic.
