Ideas on Net Promoter Score (NPS): Good to move towards Closed Loop Systems

Bain & Company, together with Fred Reichheld had coined the original Net Promoter Score as a concept; today two thirds of the Fortune 500 companies have moved on this metric quite some distance. They have internalized the concept to transform themselves as much as they have found means to achieve higher profits by serving “Promoter” Customers instead of serving “Detractors”.

But the question is how do you create economic value with Promoter Customers?

Net Promoter Score or NPS as a concept looks simple that you first try to gauge answers to one single question, “How likely is it that you would recommend our company/product/service to a friend or colleague?” This is marked on a scale from 0 to 10. Those that rate from 9 to 10 are "Promoters", while those below 6 are “Detractors”. Those scoring 7 or 8 are Passives or I call them the Fence Sitters.

Net Promoter Score is arrived at by subtracting the percentage of Detractors from the Percentage of Promoters. The higher the number of Passives, the greater the chances of NPS being pulled down further.

Such a simple concept actually could be expanded to transform the culture of the business. In the book, “The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer Driven World”, Fred Reichheld takes us through some wonderful examples.

The CEO’s toolkit to begin with is much changed with the NPS as it aids him to focus more on increasing Promoters, who would by word of mouth increase loyalty to the company as well as make allowance for higher premiums to be absorbed, which provides value to them.

The companies that have adopted NPS and improved their bottom lines are all the best companies of the world starting from Apple, GE, Amazon, Philips, Zappos, Charles Schwab, etc. They have used NPS as a Big Bang to transform their customer interface to include processes that Close-Loop problem solving as an approach; more on this later.

The concept is both Soft and Mathematical to begin with as Fred shows that NPS must drive the softer side of human nature to absorb the customer needs throughout the organization as a closed loop approach in terms of problem solving that improves the service levels continually. The soft culture of “Treat how you want to be treated” is very apt. On the other hand it must be as mathematical as possible in terms of generating profits by way of NPVs of future cash flows for Promoter Customers vis-à-vis others.

Here Fred makes a distinction that we must segregate Good Profits from Bad Profits; for example bad profits are those that are achieved at the expense of the customer, whereas good profits are those that creates a Win-Win with the customer in which there is value from both the sides. Dell actually calculated a Promoter Customer Value to its business at $328 per customer Vs a Detractor at $57.

The best example I could take is advertising, some companies generate additional sales at the cost of advertising (what is charged back to the customers). This is different from giving part of additional cost away to the customer as a benefit, for example free shipping. Bad profits are hidden in many things that companies do and they help to get the additional customer, who could well be a detractor or a fence sitter.

Bad profits could well drive the good profits away, the ones that would create value for the Promoter Customer. This is where the CFO needs to be part of this program as otherwise it becomes difficult to drive such an initiative throughout the organization.

How can we see the Economic Value of Promoter Customers?

1. We can see through higher retention rates that has no additional cost versus new customer acquisition cost.
2. Pricing: Promoter Customers are more likely to respond to higher pricing than a detractor.
3. Annual Spend of Promoters: Companies or consumers who promote are likely to spend more on your products and service. This is simple to understand that the restaurant you promote has higher share of your wallet than those chance restaurants which you sometimes try out for exploration purpose.
4. Cost Efficiency: Cost economics are far better with Promoter customers as many of the costs do not exist with them as there is much less management attention to be given to them as most problem solving is left in the closed loop systems.
5. Referrals: The positive word of mouth referrals is one single biggest factor that Promoter Customers are favored over Detractors or Fence Sitters; the best Doctor in your locality hardly ever needs any advertising or promotion.

Let me now spare a few words on Closed Loop Systems that help to improve Net Promoter Scores. In most organizations, who have still not fully adopted NPS, have mostly Open Loop systems at play in terms of problem-solving for customer. This means a problem is raised by the customer and it is passed on to the rest of the organization.

A Closed Loop system is the one where a customer complaint is solved by a cross functional team collaborating with a single minded pursuit of closing every loop at the end in an autonomous manner. The team is self-directed at best.

Open Loop systems need to be replaced otherwise they are noise generating systems with an approach that pushes blame for customer travails.

Emotional and spiritual connection with the customer, together with staff empowerment and creating autonomous problem solving teams needs a Big Bang approach.

That is where NPS steps out from the realms of the selling function and becomes an organization wide imperative.