How Valuable Are the Net Promoter Score and Other Customer Feedback Metrics?

customermetric_bigBy Evert de Haan and Peter Verhoef

A large and growing amount of firms rely on Customer Feedback Metrics (CFMs) to monitor the customer base and the performance of the marketing department. Examples of these metrics include Customer Satisfaction (CS) and the Net Promoter Score (NPS). Recently, new customer feedback metrics, such as the Customer Effort Score (CES), are gaining traction with a promise to outperform the existing CFMs.

While the positive relationship between customer satisfaction and firm performance, including revenue and profitability, is well documented in academic literature, most findings are mixed for the NPS. In regards to the new Customer Feedback Metrics, such as the Customer Effort Score, third party empirical proof is relatively nonexistent, keeping managers in the dark about the reliability of these metrics. Despite the lack of academic literature and empirical proof, many firms rely on a single metric, specifically the NPS, as their key performance indicator.

Our research team aimed to shed more light on popular Customer Feedback Metrics by investigating the following issues:

  1.  The extent in which different Customer Feedback Metrics are appropriate to monitor the customer base, and
  2. The effectiveness of using multiple metrics as opposed to using one single metric.

The research performed by our team proved that the NPS is as good as Customer Satisfaction in predicting customer retention. We also found labeling customers as Promoters, Passives, and Detractors works well for many firms. The NPS, combined with information regarding Customer Satisfaction, further improves the ability to monitor the customer base. Using multiple Customer Feedback Metrics is therefore highly recommended.

Table 1. Customer Feedback Metrics (CFM)

CFM Measurement
CS (Customer Satisfaction) “All in all, how satisfied or unsatisfied are you with [company X]?” (1 = very unsatisfied, 7 = very satisfied).
Top-2-Box CS The proportion of customers of the firm that gave a score of 6 or 7 on the CS question.
Official NPS (Net Promoter Score) “How likely is it that you would recommend [company X] to a friend or colleague?” (0 = very unlikely, 10 = very likely). Respondents who gave a score of 0–6 are “detractors,” those who gave a 7 or 8 are “passives,” and those who gave a 9 or 10 are “promoters.” Subtracting the proportion of promoters by the proportion of detractors provides the Official NPS.
NPS (Net Promoter Score) This is the average untransformed NPS score (0–10 range) provided by the customer.
CES (Customer Effort Score)  “How much effort did you personally have to put forth to handle your request?” (1 = very low effort, 5 = very high effort).

In our research, we surveyed an extended group of customers from 98 firms across 19 different industries. In this survey we measured three different Customer Feedback Metrics, including Customer Satisfaction, the NPS and the Customer Effort Score. Information regarding these three different Customer Feedback Metrics can be found in the above table.

For Customer Satisfaction and the NPS, we used the untransformed scores as well as two popular transformations. The first transformation, the Top-2-Box CS, indicates the proportion of customers providing one of the two highest scores on Customer Satisfaction at a firm level. In other words, the Top-2-Box CS is the proportion of customers who are (very) satisfied. The second transformation is the official transformation for the NPS; grouping customers into Promoters, Passives, and Detractors. Further detail regarding NPS can also be found in the table above.

Two years after the initial survey measuring the Customer Feedback Metrics, we asked the same customers if they were still customers at the surveyed firm. This allowed us to test how accurately different Customer Feedback Metrics can predict actual behavior of customers. Given the historical strong, positive correlation to overall firm performance and firm value, our team looked at customer retention.

The graph below shows the strength of the relationship between the different Customer Feedback Metrics and customer retention, while controlling for firm- and industry heterogeneity, customer demographics and relationship length. Our research found that all Customer Feedback Metrics are significant in predicting customer retention, since all Customer Feedback Metrics perform better than having no Customer Feedback Metric information (i.e. the bar most to the left in the graph).

Transforming Customer Satisfaction and the NPS do significantly improve the predictions. This is indicated by the higher bars of these two Customer Feedback Metrics compared to their untransformed counterparts. The difference between the Top-2-Box CS and the Official NPS is not significant, so these two Customer Feedback Metrics work equally well in predicting customer retention. When looking at the three bars on the right you can see that combing the Top-2-Box CS with one of the other Customer Feedback Metrics leads to even better predictions. The combination of Top-2-Box CS and the Official NPS leads to the best predictions.

Predictive Strength of Customer Feedback Metrics

Predictive Strength of Customer Feedback Metrics

The Customer Effort Score, although statistically significant, is the least predictive Customer Feedback Metric compared to the other predictive measures. This finding contradicts the promises made by the developers of the Customer Effort Score who stated that it would outperform both Customer Satisfaction and NPS. Although this may be the case in some conditions, on a broader level this Customer Feedback Metric performs quite poorly. Therefore, we highly recommend firms and managers not rush to adopt Customer Effort Score, especially as a single metric, until it has been objectively shown that it is a good indicator of future customer behavior and/or firm performance. Customer Effort Score, as an indicator of future customer behavior and/or firm performance, can be proven by independent (scientific) research, or tested by the firm.

In conclusion, we recommend firms to continue using the NPS to track customers and performance, but also include the Top-2-Box CS in the dashboard of metrics. This dashboard enhancement will enable firms to better monitor and predict customer behavior and firm performance. Furthermore, we recommend firms to not only measure these Customer Feedback Metrics, but also link these metrics to customer behavior and firm performance. Doing so will result in a better understanding of the consequences of changes in the Customer Feedback Metrics, and help to make a more educated decision about which Customer Feedback Metrics to include, or exclude, in the dashboard. This approach can better enable firms to financially quantify the impact of marketing initiatives, which ultimately can help improve the position of marketing departments within firms.

The article The Predictive Ability of Different Customer Feedback Metrics for Retention featured in the post was co-authored by Evert de Haan (University of Groningen, The Netherlands), Peter Verhoef (University of Groningen, The Netherlands), and Thorsten Wiesel (Westfälische Wilhelms-Universität Münster, Germany). It is published in the International Journal of Research in Marketing, Volume 32, Issue 2, Pages 195-206.

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foto evert_smallEvert de Haan is a PhD candidate at the Department of Marketing of the University of Groningen, The Netherlands. In September 2015 he will start as a Junior Professor in Marketing at the Department of Marketing of the Goethe University in Frankfurt, Germany. His research interests concern customer feedback metrics, marketing accountability, the effectiveness of (on- and offline) advertising, the customer’s online journey and the role of mobile devices play in this. He has published in the International Journal of Research in Marketing.

Peter VerhoefPeter C. Verhoef is Professor of Marketing at the Department of Marketing, Faculty of Economics and Business, University of Groningen, The Netherlands. He also holds a visiting position as professor at BI Oslo Norwegian Business School. He obtained his Ph.D. in 2001 at the School of Economics, Erasmus University Rotterdam, The Netherlands. His research interests concern customer management, customer loyalty, multi-channel issues, category management, and buying behavior of organic products. He has extensively published on these topics. His publications have appeared in journals, such as Journal of Marketing, Journal of Marketing Research, Marketing Science, International Journal of Research in Marketing, Harvard Business Review, Marketing Letters, Journal of Consumer Psychology, Journal of the Academy of Marketing Science, and Journal of Retailing. His work has been awarded with the Donald R. Lehmann award for the best dissertation based article in the Journal of Marketing and Journal of Marketing Research in 2003, the Harald M. Maynard Award for the best paper published inJournal of Marketing, and the Sheth Award for long-term impact of the Journal of Marketing in 2013. He is currently an editorial board member of the Journal of Marketing, Journal of Marketing Research, Marketing Science,  Journal of Retailing, Journal of Service Research, Journal of Interactive Marketing, and the International Commerce Review. He functions as an area editor forJournal of Marketing Research and he International Journal of Research in Marketing. He has extensive teaching experience for undergraduate, graduate and Ph.D. students. He is also involved in executive teaching on customer management and is the founder of the Customer Insights Center, University of Groningen. He is department chair of the marketing department.

Many People Holding a Red Welcome Back in the Sky

What You Need to Know About Customer Win-Back

By V. Kumar, Yashoda Bhagwat, and Xi Zhang   

It’s a hypercompetitive market and you are doing everything you can to retain your customers, yet you know that no matter what you do, you will still lose some customers to competitors. The competition to acquire new customers is fierce. How do you maintain your customer base? Our research team at Georgia State University looked at a large national telecommunications firm and found that it can be profitable to go after lost customers and win back their business. While it may seem counter-intuitive to spend time and money on customers who chose to leave, the reality is that you can’t retain every customer and acquiring brand new customers is expensive. Luckily, the game is not over when you lose a customer and you can revitalize your relationship. To successfully win back profitable customers who are worth your effort, you need to think about three things:

  1. who is likely to give you a second shot,
  2. if they do come back, how long they will stay, and
  3. how much they will spend.

You don’t want to waste time and money chasing lost customers who will never come back or will quickly leave again. In some cases your relationship the second time around can actually be even better than the first- but before you go chasing after lost customers you need to know some basic things about the win-back process.

  1. Your relationship the first time around matters!

The win-back process does not completely wipe the slate clean. How lost customers perceive their experience with you before they left is a strong indicator as to whether they will trust you enough to give you a second chance. Our study found that customers who spread positive word of mouth through referrals in their first lifetime were more likely to come back. Customers who complained a lot were less likely to come back. Customers who experienced a service recovery were more likely to come back.

The takeaway: the better their first lifetime relationship with you, the more willing they will be to trust you again.

  1. Why your lost customers left in the first place can give you some important insights into how they will behave.

The study categorizes the reasons why customers defect into three buckets:

  1. for price related reasons,
  2. service related reasons, or
  3. both price and service related reasons.

Why customers left can help predict how likely they are to trust you again. The study found, customers who left for better deals were more likely to come back than customers who left due to poor service. Customers who left for both price and service were the least likely to come back. More importantly, the reason customers left can tell you how committed they will be to your relationship if they do come back. Intuitively it’s easy to think that customers who left for price related reasons will easily jump ship again when a competitor offers a better deal. Surprisingly, the study found that customers who left for price related reasons stayed with the firm longer than customers who left for service related reasons. Customers who left for service related reasons may have been harder to please and retain. However, customers who left for service related reasons also spent more each month than customers who left for price related reasons. Customers who left for both price and service related reasons switched to a competitor the fastest and spent the least each month.

  1. What you offer your lost customers to win them back has a lasting impact.

Of course what you offer your lost customers will impact whether they give you another chance or not, but it also has a lasting impact on how they will behave if they do accept your offer. You need to know not only what is most effective in winning back lost customers, but how it impacts how long they will stay and how much they will spend in their second lifetimes. Our research team conducted a randomized field experiment in which we sent lost customers a limited time price discount, a limited time free service upgrade, and a bundled offer. While the bundled offer was the most successful in reacquiring lost customers, those customers who accepted it also left the firm again the soonest and spent the least compared to customers who were offered either a price discount or service upgrade. Service upgrades were the least effective at winning back customers but the customers who accepted them also stayed the longest and spent the most with the firm.

So how can you use this information when designing a win-back program? The study conducted a simulation to see what you should offer customers based on the reason they left. Do you want to increase market share and win back as many customers as possible? Then target customers who left for price related reasons with a bundled win-back offer. Do you want to acquire long term customers? Then target customers who left for service related reasons with a service win-back offer. Do you want the customers who will be the most profitable in general? Then target customers who left for price related reasons with a discounted win-back offer.

Customer win-back can be a great last resort strategy. While you should always try to retain your customers you should remember that the ones that got away are not necessarily gone forever. You can win them back and have profitable relationships with them. So in a competitive market where every little bit helps, consider reacquiring your lost customers.

The article Regaining “Lost” Customers: The Predictive Power of First-Lifetime Behavior, the Reason for Defection, and the Nature of the Win-Back Offer, featured in the post, was co-authored by V. Kumar (Georgia State University), Yashoda Bhagwat (Texas Christian University), and Xi (Alan) Zhang (University of Toledo). It is available on the Journal of Marketing website.

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Dr V Kumar PictureV. Kumar (VK), the Regents Professor, Lenny Distinguished Chair & Professor in Marketing, and the Executive Director – Center for Excellence in Brand & Customer Management at Georgia State University. VK is recognized as the Chang Jiang Scholar at HUST; China, Lee Kong Chian Fellow at SMU, Singapore; and has received twelve lifetime achievement awards in various areas of marketing including the 2015 Distinguished Marketing Educator Award from the AMS and the Paul D Converse Award.  VK has received the Sheth Foundation/JM Award, Robert Buzzell Award, Davidson Award, Paul H. Root Award, Don Lehmann Award, Tamer Cavusgil Award, and Gary L Lilien ISMS-MSI Practice Prize Award.  He has published over 200 articles in scholarly journals in marketing as well as book chapters. VK has written over 15 books including Managing Customers for Profit, Customer Relationship Management, Customer Lifetime Value, Marketing Research, Profitable Customer Engagement, Statistical Methods in CRM, and International Marketing Research. VK spends his “free” time visiting business leaders to identify challenging problems to solve. Recently, VK has been chosen as a Legend in Marketing where his work is published in a 10 volume encyclopedia with commentaries from scholars worldwide. Finally, VK is the current Editor-in-Chief of the Journal of Marketing.

Yashoda Bhagwat is currently an Assistant Professor of Marketing at the Neeley School of Business at Texas Christian University. She received her PhD in Marketing from the Robinson College of Business at Georgia State University. Yashoda’s research is primarily motivated by real world business problems and she likes to solve challenging problems for managers using rigorous methodologies. She is particularly interested in better informing marketing strategy by managing customer relationships. She was chosen to attend the 2013 American Marketing Association Sheth Foundation Doctoral Consortium as a doctoral fellow and was a recipient of the 2014 GTA Teaching Excellence Award in recognition of her accomplishments in the classroom. Her work has appeared in the Journal of Marketing and Marketing Science. In her spare time she is a sports enthusiast, foodie, and dog lover.

Xi_Alan_Zhang

Xi (Alan) Zhang is currently an Assistant Professor in Marketing, College of Business and Innovation, the University of Toledo. He received his Ph.D. degree from the J. Mack Robinson College of Business, Georgia State University. His research centers on solving relevant marketing problems by using rigorous methodologies. His dissertation titled “Managing a Profitable Interactive Email Marketing Program: Modeling and Analysis” won the Shankar –Spiegel Best Dissertation Proposal Award in 2013. One of his works won the Best Paper Award in the Digital Marketing Track of the 2015 Summer AMA Marketing Educators’ Conference. His research has appeared in the Journal of Marketing and the Journal of Marketing Research. He is the recipient of the 2015 GTA Teaching Excellence Award in recognition of his outstanding teaching performance. He currently services on the editorial review board of the Journal of Business & Industrial Marketing.

The 6 Factors that Influence Product Development Success + The Importance of Being Agile

riccardo_demarchi_500x500By Riccardo de Marchi Trevisan

At the recent Frontiers in Service conference in San Jose, CA, I had the pleasure of introducing a presentation from 3Pillar Global, Rockbridge Associates and the Center for Excellence in Service at the University of Maryland’s Robert H. Smith School of Business that was up for the Best Practitioner award.

The presentation covered a study on factors that influence software product development success that was conducted in the second half of 2014. The study is based on interviews completed with more than 200 professionals in the software development space that have shared or full responsibility for software development purchasing and procurement. The participants represented mid-sized companies in sectors like banking, entertainment or healthcare, that used software products to augment their core services.

The study culminated in the development of a Product Development Success Index – or PDSI for short – that can help companies predict whether or not their development efforts will ultimately be successful.

What did the study find? One of the key outcomes was that it identified 6 key factors that influence whether or not a company will be successful at conceiving and developing new software products. The factors are not all as technology-related, as one might think, and some of them are in fact “softer” factors and are not technology-related at all.

PDSI6FactorsThe importance of the factors was found to be, in order of importance with the weight in parentheses:

Sub-Index Importance to Product Development Success Index

Perhaps the most interesting finding of the study is that Time & Budget, which are the 2 most traditional and quantifiable ways of measuring software projects, actually were shown to have minimal impact on a project’s overall success as defined by the study.

Another key takeaway is that leaders at companies the study found to be successful are committed to agile. Twenty-six percent of companies that the study found to be highly successful engaged in at least five agile practices, whereas none of the companies that were found to be rarely successful engaged in that many agile practices.

The measures of agile development that respondents to the study were asked included:

  • Length of time from idea to working software (3 weeks or less)
  • Whether new software is covered by automated tests
  • Frequency of review and re-planning priorities (every 3 weeks or more often)
  • Frequency of end user testing (every 3 weeks or more often)
  • Frequency of process improvement (every 3 weeks or more often)
  • Whether team members exchange information and learn from each other
  • Whether business and technical teams collaborate on software development projects

Another key finding from the study was that there is a perception gap inside companies between senior management (i.e., Vice President and higher titles) and those directly involved in development activities (i.e., Director or lower titles), which can have a profound effect on their overall success.

Professionals at the Vice President level or higher rate their company better on many areas of the PDSI and also believe their companies are performing better on a variety of software product development business goals. For example, 54% of senior executives say they are successful at meeting customer needs compared to 32% of more junior employees.

Contrary to this trend, Vice Presidents and higher report similar levels of performance on a variety of business outcome metrics, including revenue, brand perception, customer loyalty and customer growth. This indicates that while there is a shared consensus between rank and file and senior executives on the business success of their firms, the senior level professionals tend to be far more optimistic in their view of their organization’s success in new software product development.

One problem that may result from this perception gap is that senior decision-makers may ignore key problem areas that, if addressed, could improve their overall success. Similarly, the rank and file employees may fail to see the total picture, harboring an overly pessimistic viewpoint that could impact morale. Summing it up, this study provides valuable insights into how companies can bolster the success of their internal software development functions. This is an area of increasing importance to clients of 3 Pillar Global who rely on custom software solutions to drive their core business, improve customer value and create new revenue streams.

Please visit www.PDSInsights.com to learn more about the Product Development Success Study, get your organization’s own product development readiness grade, and read related content on how to build an organization that is optimized to build software successfully.

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linkedinRiccardo de Marchi Trevisan is the Business Development Executive at 3Pillar Global. Previously, he worked for Forum One and Development Gateway, where he supported international governments, non-profits, and research institutions in the identification of solutions that can solve important issues related to the international development field. Riccardo is a seasoned technologist with experience in community engagement, digital communication, and international relations. He is a native of Trieste, Italy, and has an executive master’s degree in international services from American University and a J.D. from LUISS University in Rome.

Smart_technology

Internet-of-Everything and the Future of Service

By Darima Fotheringham

Two weeks ago I attended Frontiers in Service, (#frontiersinservice) a global conference on service research. This year, the conference was sponsored by IBM and a lot of discussion was around the Internet-of-Things (IoT) or Internet-of-Everything, as it was frequently referred to. One of the presentations that I found especially interesting was by Irene Ng, Professor of Marketing and Service Systems and Head of Service Systems Research Group at the University of Warwick. She talked about smart technology, interconnectedness and data in a different context than the one that prevails in the IoT industry discussion. I found her perspective both simple and deeply profound. It highlighted a few important questions that I want share with you.

Technology developers are constantly pushing the envelope of what’s possible. However, it seems that in their fascination with the new technological capabilities, companies sometimes lose track of the most important element; humans as the ultimate customer and consumer of IoT. It is important to bring the human factor front and center into the design and use of smart things. IoT allows smart things to track and make use of large amounts of data, but it’s humans who are the integrators of data. It is not about our smart dishwashers being able to talk to our smart fridges. It’s about how these capabilities of smart appliances, and their “conversations”, can be integrated in our lives in a useful and empowering way. Continue reading

The Service Infusion Continuum

From Products to Services and Solutions. Embracing Customer Centricity in B2B

Interview with Mary Jo Bitner and Stephen W. Brown, co-authors of the book “Profiting From Services and Solutions: What Product-Centric Firms Need to Know”. The interview was recorded in July, 2014, when the book first came out. To learn more about the Service Infusion Continuum framework introduced in the podcast, check out CSL webcast Profiting from Services and Solutions available on the CSL blog.

Podcast Transcript

This podcast was brought to you by the Center for Services Leadership, a ground-breaking research center in the W. P. Carey School of Business at Arizona State University. The Center for Services Leadership provides leading edge research and education in the science of service.

Darima Fotheringham: Today I’m joined by Professor Mary Jo Bitner, the Executive Director of the Center for Services Leadership at the W.P. Carey School of Business, Arizona State University, and with Emeritus Professor Steve Brown, Distinguished Faculty with the Center for Services Leadership and a Strategic Partner with the INSIGHT Group, a global services growth consulting firm.

Q: For those who may be new to the Center for Services Leadership, can you tell us a little bit about yourself and your coauthors?

Mary Jo Bitner: We represent a 4 member faculty team that wrote this book together. We worked together on the research and the writing of the book from the very start to finish. One of the foundations for the book is a major research project that we did with 5 Fortune 100 companies seeking to understand their challenges, their successes and insights as they moved from being product-centric to customer-centric and service-centric firms. It was a long project, over multiple years. The co-author team is Steve Brown and myself, also Valerie Zeithaml, who is a Marketing professor at University of North Carolina. She’s internationally known for her work in Service Quality and Customer Equity and also in the work that we did for the book. Steve Brown is an Emeritus Professor of Marketing at ASU. He founded and led the Center for Services Leadership for over 25 years. Now he’s a consultant, author and an executive teacher focusing on helping firms in this area. Jim Salas is the fourth author of the book. He’s an Assistant Professor of Marketing at Pepperdine and he recently graduated with his PhD and his dissertation work focused on strategies helping firms move into services. And then myself, Marketing Professor here at ASU and Executive Director of the CSL. We worked together as a team of four from the beginning to the end and are very excited to have our book out.

Q: What inspired you to write “Profiting from Services and Solutions: What Product-Centric Firms Need to Know?”

Steve Brown: There are several things. One, of course, is working with all the member companies of the Center for Services Leadership. Many of them, over the years, came to Mary Jo and myself and others and talked about how they, being very product-centric companies, wanted to grow into services and solutions. This is probably the biggest catalyst for the research project that underlies the book. We also knew that there was relatively little known about this topic except anecdotally. And what the book tries to do is study in depth these 5 companies but also integrate some of the latest literature on this topic and then feature several rich examples from companies that have either gone through this transition or are going through this transition right now. Continue reading

Transparency

Is Transparency Good for Business?

By Seigyoung Auh, Omar Merlo, and Andreas Eisingerich

In 2012, the global fast food chain McDonald’s launched a website in Canada called “Our Food. Your Questions”. The digital platform allowed consumers to ask the company absolutely anything about its food. As the website increased in popularity and customers asked some very tough questions, the company and its products were not always cast in a positive light. However, McDonald’s was seemingly happy to face both the good and the bad.

Even the toughest critics could vent or probe in the public forum. Immediately after the launch of this initiative, the Internet was awash with claims that McDonald’s had just committed an enormous marketing blunder. Surely shouldn’t a company always strive to present itself positively, minimize public scrutiny and criticism, and carefully filter customer-generated content on its digital platforms? The outcome of the initiative suggests otherwise. The yearly target for questions was exceeded by 400% in only 6 months. The company experienced 10 million interactions online with customer engagement exceeding 4 minutes per visit. Perceptions of the quality of the food, as well as brand attitude measures improved. Most importantly, customers were spending more on the brand, evidenced by an increase of 50% in monthly store visits. Continue reading

How Does the Referral Behavior of Switchers and Stayers Differ?

Center for Services Leadership:

Are you trying to increase customer referrals? This research suggests to target a specific segment for maximum results.

Originally posted on Management INK:

[We’re pleased to welcome Alisha Stein and B. Ramaseshan, both of Curtin University. Drs. Stein and Ramaseshan recently collaborated on their paper recently published in Journal of Service Research entitled “Customer Referral Behavior: Do Switchers and Stayers Differ?”]

02JSR13_Covers.inddWe recognized that in today’s highly competitive market environment, customer referral plays an important role in enhancing firm value through cost-effective acquisition of new customers. Service managers have to leverage the current customer base to increase referrals. To do this effectively requires an understanding of the heterogeneity among their existing customers. Such an understanding will enable service providers to develop separate customer referral strategies that are most appropriate to each of the distinct groups within the customer base. Recognizing this, we examined the customer referral behavior across two distinct customer groups – ‘switchers’ and ‘stayers’. Switchers are those who have switched to the service provider from another, while Stayers are customers…

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