The "Net Promoter" Concept and Consistently Superior Total Returns

Monday's Wall Street Journal's "Theory & Practice" column featured a concept known as "net promoter." According to columnist Scott Thurm, the concept is "advocated by consulting firm Bain & Co., market researcher Satmetrix Systems, and author Fred Reichheld." Reichheld is a director emeritus at Bain & Co.

Apparently, the essence of the concept is to assess, on a 0-10 scale, customer responses to the question,

"How likely is it that you would recommend us to a friend or colleague?"

The high values (9-10) are "promoters," middle values (7-8) are deemed "passives," while the lower values (0-6) are considered "detractors." A "net-promoter score" is determined by "subtracting detractors from promoters." Whether that is in aggegrate, then taking an average, or by some other method, is not specified in the article.

In his column, Thurm discusses an emerging debate regarding whether or not the net promoter concept is effective for predicting revenue growth and "other customer satisfaction measures."

A Neil Morgan, assistant professor of Marketing at Indiana University, is quoted as saying,

"Does this thing predict business performance (my bold) or not?....There is no evidence that it does."

Without an explicit and defensible definition of "business performance," I'd say Mr. Morgan's comment is rather obvious, wouldn't you? The article goes on to state that Reichheld claimed, in a book, that, "on average, a 12-point increase in a company's net-promoter score doubles its growth rate." Apparently, Bain has now backed away from the claim. Not a good sign, eh?

Among the measure's supporters is, we are told, no less than Jeff Immelt, the continually-underperforming CEO of GE. This alone would make me suspect of the concept. Foundering large companies are not the best place to look for testimonials on a new management concept. When combined with the Bain backpedaling, I'd take this concept's value as a quantitative, or explanatory variable, with a grain of salt.

What I find curious is why nobody has thought to study the relationship between promoter scores, net-promoter scores, and total returns. I'd have to know more about the time dimension over which one can apply the promoter scores before associating it with a company's consistency of superior total return over time, but the question interests me greatly.

As a marketer by training and initial business experience, I find the basic idea interesting, and potentially useful. However, even after Googling the term "net promoter concept," and reading through this Bain webpage, I am at a loss as to know precisely how one "subtracts" the promoter scores from the detractor scores. Are they averaged? Normalized? Over what sample size? Time period?

The Phelon Group, mentioned in the Journal column, describes its own proprietary approach to operationalizing the concept here.

To simply measure a sort of 'recommended buy/rebuy' rate, at the extremes, where really passionate advocates or detractors will operate, makes intuitive sense. But, to quantify the effect, I would think you'd need to relate it, once you understand how to actually work with the measure, to a company's overall success in creating shareholder value over time, i.e., consistently superior total returns. It seems, though, at this point in time, that the mechanics and interpretations of the basic measure still constitute what might be termed an "art form."

Regardless of which method one uses to operationalize this concept, I would reserve judgment on its being anything more than another passing fad, until I see some solid research relating it to a company's ability to consistently earn superior total returns for its shareholders.