Sunday, November 05, 2006

What Are the Implications of the Morgan and Rego Study for Companies Focusing on Word of Mouth Marketing?

Over the weekend I posted a series of entries summarizing an important article that tested the value of various customer feedback metrics to understand how they relate to key indicators of business performance. I reviewed what the authors saw as the implications of this study and now I want to offer some of my thoughts as well.

Let’s start with the use of the Net Promoter Score. If the Morgan & Rego had computed their “net promoter” metric in the same way as the Bain/Satmetrix “Net Promoter Score” and then found the same results, then this study is a very big deal because a compelling reason companies have adopted the NPS metric is because of its correlation with revenue growth. We’ll have to await future studies from these or other authors that make an apple-to-apple comparison.

I haven't heard a response from Fred Reichheld or Bain/Satmetrix, but I imagine their response might be similar to a recent blog post Fred Reichheld made on his blog.

In response to other criticisms of the Net Promoter Score (besides Morgan and Rego), Fred Reichheld makes two points in the metric’s defense. First, he argues that NPS was never based on statistical correlations but instead based on the relationship between customers’ survey scores (their likelihood to recommend to others) and their subsequent behavior. He states that “People who rate a company higher on the NPS scale buy more and refer more friends to the company than people who rate it lower” (though Morgan & Rego would also dispute this; see p. 437). Reichheld claims that the statistical correlations are “not the foundation of the NPS theory, merely supporting evidence.” According to this reasoning, then, the Morgan & Rego finding showing a non-significant correlation for the net promoter metric and business performance is far less damaging.

The second defense that Riechheld offers is that industry definition is extremely important. He says that you can’t just look for correlations between NPS and business performance in the “online retailing” industry because this is too broad (for example, Home Depot and Victoria’s Secret are both in retailing, and and are both online retailers, but neither of these pairs are really in the same business.

Reichheld’s bottom line is this: “In testing the relevance of NPS to your business, avoid starting with correlations. Instead, begin with real behaviors of individual customers over time. Then, when you examine the correlations of NPS and growth rates, focus your analysis on your true competitors.” This point about industry specificity is crucial since one of the limitations that Morgan & Rego identify is that they can generalize across industries but cannot account for differences within or between industries (see p. 437).

From my perspective, even if companies find value in using the NPS, the prescription that it’s the “only” number a company needs to grow is misleading (many others have noted this as well). For example, if a company has a low NPS score it’s important to understand *why* the number is low so that the company can improve. Thus additional research to determine why people talk positively or negatively is still necessary. Additionally, companies need to focus on other business indicators besides just revenue growth (therefore Morgan & Rego’s critique that revenue growth is not the only indicator of business performance is still valid).

So, should a company who’s currently using the Net Promoter Score stop using it based on the findings from the Morgan & Rego study? For many companies, it seems that it has helped the company focus on creating a better product or service experience for the customer. It has also directed people’s attention to the importance of customer word or mouth.

If a company is not currently using the Net Promoter Score, should they start using it? My best advice here is to let the power of WOM loose and seek out those companies who have used NPS to find out about their experiences in their particular industry. Let the power of a peer recommendation work its magic.

OK, so setting aside the NPS, Morgan and Rego’s study is also relevant to the WOM marketing industry because it confirms the value of ensuring customers have satisfactory experiences such that they don’t generate negative WOM or complaints. Additionally, companies need to focus on customer complaints, use these as a source of consumer insight into what makes them satisfied, and also better handle the complaints to offset the deleterious effects of negative WOM.

I’d love to learn what readers think. What do you think are the implications of the Morgan & Rego study for the WOM marketing industry?