It’s always puzzled me. Why do so many businesses focus on finding new customers rather than keeping the ones they’ve got? Research shows that it costs five times more to do this. And this is even more crazy as existing customers are 50% more likely to try new products compared to new customers. Increasing customer retention rates by 5% increases profits by anything between 25 and 95%. That’s staggering!
This was a big revelation when I was doing my MBA. At the time, I was in a jewellery business looking at ways to increase sales in Scotland. Whilst researching, I came across Fred Reichheld’s work and realised that if we’d reduced customer churn, our Scottish business would have been huge already.
Later, as UK Managing Director of Rackspace, I knew the thing that would drive our economic engine more than anything else was churn. Rackspace was a small company with big ambitions. We wanted to disrupt IT service delivery in the UK but had limited resources. The only way we were going succeed and grow as fast as we wanted was through word-of-mouth marketing. Our existing clients became a massive source of new business and were the reason we grew to £26m in only five years in the UK. This was on the back of an amazing service delivery programme and brand promises with guarantees.
But this didn’t just happen overnight. It took a deliberate strategy and central to this was Net Promoter Score®. So, what were the reasons I chose this metric? Why is NPS so effective to growing businesses?
NPS is simple
That’s the beauty of the thing. It’s just one question. One! In a world where customer surveys can be endless, it’s a real breath of fresh air. Back in the day, I’d worked with complicated customer satisfaction surveys with 50 questions, giving me an end score of 4.93. What the hell did that mean? No-one knew!
Fred Reichheld spent two years refining that single, all-important question. It needed to link the survey responses with actual customer behaviour (purchasing patterns and referrals) and ultimately with company growth. He tested a number of forms of words and eventually landed on, ‘Would you recommend (name of company) to a friend or colleague?’ The answer to this question is given on a scale of 0-10. If customers give you a 9 or 10, they are a ‘promoter’, a 7 or 8 they are ‘passive’ and 0 – 6 a ‘detractor’. Subtracting the total number of detractors from the promoters gives a Net Promoter Score of anything between -100 to +100.
What has always struck me is 9 or 10 is a high bar. In previous customer satisfaction exercises, companies would have been delirious with a score of 7 or 8! In fact, they would probably have counted anyone giving a score of 5 or more as satisfied. What NPS is saying is that customers that give you 5s and 6s hate you, 7s and 8s don’t really care and only 9s or 10s are worth your additional effort as they are the ones that will spend more and refer you.
Other customer satisfaction surveys seem to be more about patting yourself on the back and saying, ‘We’re not sh*t’. But they don’t tell you whether a customer will churn. These traditional surveys may give you superficially good satisfaction scores, but you’ll still find customers leaving or buying stuff from your competitors. NPS tells you that, unless they’re super engaged, you haven’t got them anywhere.
Strengthens relationships with customers
It’s all about the relationships you’ve built with your customers. When you do NPS, as well as scoring you, your customers are asked to tell you why they’ve given you that score. I’ve always taken these free text comments and rung clients up afterwards – they’re a heaven sent opportunity to build a relationship. This makes your clients feel heard – a rare thing in surveys. Perhaps you can offer them a credit or discuss what you could have done differently. You can use NPS as an on-going mechanism to build relationships.
NPS is a behavioural metric. It accurately measures the degree to which your customers are emotionally connected to you. This is important because the more connected they are, the more they are likely to cut you some slack in times of difficulty. If you have a service failure, you’ll have in-built resilience.
At Rackspace, NPS became our secret weapon. We grew 1% every month, even if didn’t win new customers. Across the IT industry, our competitors were either flat or shrinking if they didn’t pull in more customers at the top. Attention to the ‘leaky bucket’ drove profitability through our purpose of ‘Fanatical Support®’.
Most other IT companies saw service as a cost and were in cost/service minimisation mindset. We were completely the opposite. We were mad on service! Totally unlimited. More service that would be deemed sensible if we were trying to profit maximise. Because that wasn’t our focus. It was all about maximising NPS and through doing that, everything else would take care of itself – and it did. Spectacularly!
Constant finger on the pulse
Traditionally, satisfaction exercises are done annually, on the same day, for all clients. With NPS you have flexibility. You can break the surveys down into manageable chunks and do some elements of your customer base over time. In the past, we’ve decided on a certain number of clients every week to get a 3-month rolling average. This is far less overwhelming, giving the opportunity to digest daily, weekly and monthly data that can feed into course corrections or changes to products, service or people. It’s all about getting into a regular rhythm.
In all the companies where I’ve been MD, I’ve insisted executive level staff speak to at least one customer every week. Getting senior level staff involved in the follow-up indicates the importance of NPS to both staff and customers. A great way to embed it in the business.
Acts as an early warning system
Put in place NPS and you’ll have an efficient early warning system to alert you to any issues with customers before they do too much damage. Instead of waiting for an annual customer survey, you can sort things out fast. You’ll quickly identify unhappy clients who’ve had a service failure and you can get in there quickly with remediation. Research shows that if you can spot and fix problems, your customers will love you more than if there was no service failure in the first place.
Generally, you’ll find the customers who are motivated enough to fill in the NPS surveys want you to do better. It’s the ones who don’t bother that you should be really worried about. They’re not even engaged enough to tell you you’ve been sh*t! You need to find out if you’re asking the right people. Have you uncovered an expectation gap? Are they the wrong customer for you? Is there a mismatch there?
Enables strategic decisions
NPS will help you spot where 90% of your future profit is going to come from. Imagine the power of this information! You can slice the data, focusing on specific customer cohorts. You want all your most profitable customers to be giving you 9s or 10s so the focus should be on keeping these people happy specifically. At Peer 1, our top 5% of customers were worth 60% of our revenue. So you can guess who got the most attention! We restructured several times to focus more resources on improving the service delivery to this cohort.
Don’t assume it’s going to be your biggest clients that are your most profitable. Some smaller customers may be great advocates of your brand with the power to refer you to others who become big spenders. Pay attention to that small digital agency – they might refer you to every one of their clients!
If you’re using NPS effectively, all of your quarterly targets should contain some reference to NPS data. Customer cohorts can be created to prioritise fixes. So, for the next quarter, ask yourself, ‘What is the big thing that we’re going to fix that will drive an uptick in our NPS over time?’
You may find cohorts of customers that are less important to the organisation. If the NPS is not so high in these areas, you can decide that you won’t focus any additional effort here. Tell your staff and explain this to the customers. Accept that you might lose them or even may have to fire them. You can’t do everything. Keep your eye on the bigger prize.
Use it as a motivator
Games have rules, white lines and scores. To get better over time, the team need to deliberately practice and know the score in real time. Not just the rules and the white lines.
A regular feedback mechanism like NPS will give your staff real-time information on how they’re doing. It’s a brilliant motivator. At the end of last year, I interviewed Tony Pandher, Head of Ops at Macquarie Cloud Services for my podcast. He’s ‘gamified’ NPS by creating ‘The League of Legends’. If their support technicians get 10 x 10s in a row on their NPS transaction tickets, they take part in this prestigious, monthly competition. They are the heroes of the organisation.
Sales is all about confidence. And what better way to build confidence than by getting salespeople to talk to happy customers. I suggest that your new business team calls all customers who’ve scored you as a 9 or 10. If they’re fed with these positive news stories, they will be more confident in their marketplace.
Changes culture and mindset
One of the best things about NPS for me is its ability to shift mindset and culture in a business. On a philosophical level, it creates a culture of seeking criticism. If you’re constantly told you’re amazing, you’re not likely to change anything. But if you have a mechanism where you’re receiving a lower score than a 9, you can ask ‘What could we have done better?’ This is what happened at Rackspace. Our culture sought criticism so it could improve.
As a Business Coach, I meet people who are negative about NPS. They tell me they tried it and it didn’t work. When I delve a bit deeper, I’m struck that it’s like learning to swim by reading a book. They’ve rolled it out with a really shallow understanding of what it takes to make it a success. There are some fantastic resources out there (links are below) telling you everything you need to know but using it successfully takes deliberate practice and effort. It doesn’t come easily.
NPS will tell you the truth about your organisation. And if you’re uncomfortable with that, then it’s better not doing it at all as you’ll set false expectations in your customers and staff.
Written by business growth coach Dom Monkhouse. Find out more about his work here.
Melting Pot NPS episodes: