Why Your CEO Loves NPS: It Is Never Audited, and It Never Declines
Market research has made it all the way to the top! It has a seat at the c-suite table just as marketing and research champions have hoped for all these years.
According to a recent analysis by The Wall Street Journal, a large number of CEOs now track their company’s Net Promoter Score (NPS) obsessively, which they report as a measure of corporate performance along with financial data, just like profits and sales. They use the scores to calculate bonuses, justify capital expenditures, explain acquisitions, and provide earnings guidance to investors.
Quoting from their analysis:
Last year, “net promoter” or “NPS” was cited more than 150 times in earnings conference calls by 50 S&P 500 companies, according to a Wall Street Journal analysis of transcripts. That’s more than four times as many mentions, and nearly three times as many companies, compared with five years earlier. . . . Dozens of public companies are reporting the score in securities filings. Last year, “net promoter” was mentioned in 56 proxy filings. Some companies, including American Express Co., Best Buy Co. and Citigroup Inc., list the metric as a criterion for executive compensation, alongside traditional measures such as revenue growth and earnings per share.
But there are problems, the Journal notes. First, academic studies cast doubt on whether it truly predicts growth in the way corporate executives have come to believe (or at least want to believe). Second, “out of all the mentions the Journal tracked on earnings calls, no executive has ever said the score declined.”
Third, and perhaps most importantly, NPS scores are never audited. Nor do companies touting NPS share the messy internal details behind such scores, such as response rates, sample sizes, the quality and representativeness of their data, margins of error, and all the sources of likely bias inherent in their measure, including the many ways employees may gin up scores to meet management targets and win bonuses.
Alas, even the originator of NPS, Fred Reichheld, is quoted in the Journal as saying NPS as a measure of corporate performance is “completely bogus.”
For sure, there has always been a strong upside to the simplicity and intuitive appeal of NPS. It is easy to communicate and it makes sense. It works just as well as (though not better than) other measures of customer satisfaction. Definitely, it can offer insight when executed well and when integrated into a customer-focused research program.
But if you are a market research or insights professional now happily seated at the table with your corporate officers, please remind them that NPS can provide great insight, but it is not a good measure of corporate performance. If your CEO is in love with NPS, then your job at the table should be to offer a more honest perspective and approach to bringing NPS into corporate decision-making.
—Joe Hopper, Ph.D.
OTHER ARTICLES ON THIS TOPIC