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NPS: The Next Six Sigma?

"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, 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.

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