NPS: The Next Six Sigma?

The "net promoter score" for measuring customer

loyalty is emerging as a favorite metric for managers
seeking organic growth

"I have little doubt that this will be as big and long-lasting for GE as Six Sigma
was," a senior General Electric (GE ) executive told BusinessWeek in January (see
BusinessWeek.com, 1/30/06, "Would You Recommend Us?"). The executive, Peter
McCabe, chief quality officer for GE Healthcare, was talking about the "net
promoter score" (NPS), a method of measuring customer loyalty.

McCabe was prescient. Since then, GE Chief Executive Jeffrey Immelt has told
shareholders that the entire company will be using NPS and that it will play a
central role in his strategy to drive organic growth.

Indeed, business leaders and investors are likely to hear more about NPS, and not
just from GE. NPS is the culmination of more than 20 years of work aimed at
developing a reliable measure of customer loyalty. The link between loyalty and
growth should be obvious, though it never shows up on a financial statement. Loyal
customers keep buying. They increase their purchases over time. They refer their
friends and colleagues. They make suggestions and provide honest feedback.

WALLET SHARE. Many studies have examined this "loyalty effect" and the
results have consistently shown that companies with the highest customer loyalty
typically increase revenues at more than twice the rate of competitors.

Before the advent of NPS, companies didn't know how to measure loyalty and
therefore weren't able to manage for it. Conventional customer-satisfaction surveys
aren't up to the job. Detailed analysis of individual customers shows that between
60% and 80% of defectors (disloyal customers) pronounce themselves "satisfied" or
"very satisfied" just before they defect. Moreover, satisfaction data is impractical
for driving daily managerial priorities and tradeoffs. To manage for loyalty,
managers need timely, granular, and actionable data, the kind they see on their
financial statements.

That's where NPS comes in. Research conducted by Bain & Co. established that one
question reliably indicates customer loyalty (as evidenced both by repurchase
behavior and by referral rates) in most industries. The ultimate question: "How
likely is it that you would recommend this company to a friend or colleague?"
Customers who rated a company high on the "likely" scale bought more goods and
services, bought them more often, gave the company a greater share of their wallet,
and were more likely to talk up the company to others.

USEFUL NUMBER. We also discovered that some simple arithmetic yielded one
particularly useful number. Ask customers to score your company on the "would
recommend" question, using a 0-to-10 scale. Label those who give you a 9 or 10
promoters—they are the assets that drive your growth. Label those who rate you
from 0 to 6 detractors—they are the liabilities that eviscerate growth. Subtract the
percentage of detractors (liabilities) from the percentage of promoters (assets) and
you have your net promoter score.

Tracking NPS month in and month out—by branch, division, product line, or
whatever else makes sense—helps focus organizations on the basic engine for
profitable growth, getting more promoters and fewer detractors.

In fact, NPS correlates well with growth among competitors. In airlines, for
example, no airline has had superior growth without a superior ratio of promoters
to detractors. In warehouse retailing, Costco (COST ) has the highest NPS and by
far the best growth. A new study of retail banking shows the same pattern, with
growth rates closely matching NPS scores. The leader here is New Jersey–based
Commerce Bank.

CRUCIAL FOR GROWTH. NPS also sheds light on what ails so many American
companies and industries: Too many of their customers are detractors who would
like them to fail. Loyalty leaders such as Southwest Airlines () and American
Express (AXP ) register NPSs around 50%, and a handful of companies, such as
Harley-Davidson (HOG ), range above 80%. But the average U.S. company sputters
along with an NPS of only 5% to 10%, meaning that promoters barely outnumber
detractors. Given such scores, is it any wonder that consumer attitudes toward
business are at a 20-year low? Or that so many companies have trouble growing,
except through the short-term fix of acquisitions?

Since we did our research, GE and other leading companies have created NPS
measurement systems and have begun to track and report their scores. (Enterprise
Rent-A-Car devised its own NPS-like metric some years ago, and has used it
successfully ever since.) This "generates insights to improve products and services,"
as GE explains on its Web site; "it fosters a grass-roots, cross-functional focus on the
customer." It's a big plus for investors as well. Since growth is the primary driver of
relative stock prices, investors in these companies will now have a reliable metric
indicating the primary driver of growth.

MORE THAN A METRIC. Like any good metric, NPS presents challenges.
Companies must spend a significant amount of resources gathering and reporting
reliable data. They must track variations in NPS, and they must understand how
and why customers react as they do to their products and services. They must also
understand the causes of variations in NPS, using surveys, field observations, and
analysis of customer comments to identify problems and opportunities. And they
need to address those problems and opportunities fast, holding management teams
accountable for improving their NPS.

Like Six Sigma, NPS is more than a metric—it's a set of disciplines for using that
metric to understand customers and drive strategy and operations. Companies need
to learn these disciplines, not just the metric itself.

The old vital statistics—net profit and the like—tell companies how they are doing
financially. The new one, as GE understands, helps them know what their customers
really think of them and whether they will drive or throttle profitable growth. In the
long run, that may be even more important for a company's health.

Fred Reichheld, a Bain fellow, is the author of three books on loyalty including the
current best-seller The Ultimate Question: Driving Good Profits and True Growth
(Harvard Business School Press, 2006). His work in the area of customer and
employee retention has quantified the link between loyalty and profits. Rob Markey
is a partner at Bain and director of the firm's Global Customer Strategy &
Marketing practice. He has worked extensively in the financial services, retail,
health care, and media industries