Friday, November 03, 2006

Very Important Study! -- The Value of Different Customer Satisfaction and Loyalty Metrics in Predicting Business Performance

OK, this is a big one.

There’s a very important study for those interested in WOM marketing that has been published in Marketing Science, a well respected marketing journal, about which customer satisfaction and loyalty metrics best predict a firm’s business performance. It’s an even bigger study for those invested in the use of the Net Promoter Score.

Much has been made of the Net Promoter Score (NPS) as a powerful metric for companies to get a handle on the WOM activity of consumers. According to the proponents of the NPS, asking one simple question, how likely a person is to recommend a company or brand to their friends or colleagues, will allow you to effectively monitor a firm's performance (e.g., a firm's level of revenue growth). They claim that other metrics, such as satisfaction measures that so many firms routinely use, are far less important and perhaps not even worth using. While Reichheld and colleagues have been praised for coming up with an easy-to-implement solution to benchmark their success with WOM, they have also come under fire for over-simplifying the process of WOM tracking by advocating for just this one question.

At least one study has been conducted to confirm the findings of the NPS, extending it from U.S. companies to U.K. companies (opens into PDF file; see my blog post about this study), but there has been no peer-reviewed academic journal articles where the central premises of the NPS have been studied. Until now.

Researchers Neil Morgan and Lopo Leotto Rego entitled their article "The Value of Different Customer Satisfaction and Loyalty Metrics in Predicting Business Performance."

In their manuscript they offer what amounts to a scathing critique of the NPS arguing that it's 1) ineffective in predicting business performance and 2) misguided for companies to simply use this metric. By the way, these same researchers published counter-point letters-to-the-editor in the Harvard Business Review following the publication of Reichheld's influential article in the same publication.

This article deserves a careful read and consideration. However, like any research, there are important limitations that we also need to consider. Over the next few posts I'll offer a summary of the article and what I see as its implications to the use of the Net Promoter Score by companies and the WOM marketing industry.

For starters, here's the abstract (due to copyright restrictions I won't post the article here; it can be accessed at your local university library*):

Managers commonly use customer feedback data to set goals and monitor performance on metrics such as “Top 2 Box” customer satisfaction scores and intention-to-repurchase” loyalty scores. However, analysts have advocated a number of different customer feedback metrics including average customer satisfaction scores and the number of “net promoters” among a firm’s customers. We empirically examine which commonly used and widely advocated customer feedback metrics are most valuable in predicting future business performance. Using American Customer Satisfaction Index data, we assess the linkages between six different satisfaction and loyalty metrics and COMPUSTAT and CRSP data-based measures of different dimensions of firms’ business performance over the period 1994–2000. Our results indicate that average satisfaction scores have the greatest value in predicting future business performance and that Top 2 Box satisfaction scores also have good predictive value. We also find that while repurchase likelihood and proportion of customers complaining have some predictive value depending on the specific dimension of business performance, metrics based on recommendation intentions (net promoters) and behavior (average number of recommendations) have little or no predictive value. Our results clearly indicate that recent prescriptions to focus customer feedback systems and metrics solely on customers’ recommendation intentions and behaviors are misguided.
Very exciting stuff! Let's dig in...

* You can find the article in Marketing Science, Vol. 25, No. 5, September–October 2006, pp. 426–439.

UPDATE: You can find a pre-press version of the article on Dr. Rego's site. [Thanks to Constantin Basturea for pointing this out!]