The Microeconomics of Customer Relationships

Using net promoter score, a metric that, in most industries, correlates well with a company’s growth rate, managers can evaluate how investments aimed at improving the customer experience actually affect the bottom line.

Jeffrey R. Immelt, chairman and CEO of General Electric Company, recently announced the extraordinary goal of boosting GE’s organic growth rate from 5% a year to 8% — a 60% increase for a company that is already the ninth largest (by revenue) in the world. As part of the strategy for reaching this ambitious target, Immelt has encouraged many of GE’s divisions to apply a simple customer-relationship metric known as “net-promoter score.”1 The ideas behind NPS, which have been around for a couple of years,2 are simple. A company asks its customers just one question — “How likely is it that you would recommend us to a friend or colleague?” — and then scores the results on a zero-to-10 scale with 10 representing “extremely likely” and zero representing “not at all likely.” Customer responses tend to cluster in three groups, each of which is associated with a set of behaviors. One group is made up of customers who give the company a nine or 10 rating. They are known as “promoters” because they behave almost as if they were adjuncts to the organization’s sales force. They report by far the highest repurchase rates, account for more than 80% of referrals and are the source of most of a company’s positive word-of-mouth. A second segment rates the company seven or eight and might be dubbed the “passively satisfied” or passives. Their repurchase and referral rates are considerably lower than those of promoters, often by 50% or more. Finally, those who give a company ratings from zero to six are known as “detractors.” Detractors are the least likely to repurchase or refer, and they account for more than 80% of negative word-of-mouth. A company’s NPS is simply the percentage of promoters minus the percentage of detractors, a metric that turns out to correlate well with increases in a company’s growth rate.

New studies show that NPS is correlated with growth rates in most competitive industry. Researchers from Bain & Company have found that, on average, a 12-point increase in NPS corresponds to a doubling of a company’s growth rate, though the variation from one industry to another is substantial. More recently, a careful study of four U.K.

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References

1. This term has been trademarked by Satmetrix Systems Inc., and ownership of the trademark will be shared by Satmetrix, Bain & Company, and the author of this article.

2. See F.F. Reichheld, “The One Number You Need to Grow,” Harvard Business Review (December 2003).

3. P. Marsden, A. Samson and N. Upton, “Advocacy Drives Growth,” Journal of Brand Strategy (November 2005).

4. NPS reflects actual referral and repurchase behavior, and much growth comes from referrals. The London School of Economics–Listening Company study, which compared relative growth rates both before and after the researchers gathered their NPS data, concluded that “word-of-mouth [as measured by NPS] drives growth and not vice versa.”