Tuesday, October 15, 2013

How Many of Your Clients Are Promoters?

Getting referrals is your best marketing strategy. That's the conclusion of two major studies of professional service marketing by RainToday and Hinge, respectively. I suggested some strategies for increasing referrals in this previous post. But how many of your clients are ready to recommend you? You should find out.

Why? Because it can be a very useful metric and it's relatively easy to track. Many of the world's leading companies are tracking recommendation rates—a measure called Net Promoter Score—including Microsoft, Apple, Amazon, GE, eBay, Costco, and Samsung. NPS was introduced in 2003 by Fred Reichheld of Bain & Company and soon attracted a large and prominent following. It was the culmination of Reichheld's research into which metrics best correlated with customer loyalty and revenue growth.

NPS is centered on a simple question: "How likely is it that you would recommend our firm to a friend or colleague?" Customers answer with a score based on a 10-point scale, with 10 meaning "very likely" and 0 indicating "very unlikely." Reichheld defined three categories of respondents depending on their scores:
  • Promoters (scores 9-10). Loyal enthusiasts who will continue to use your services and recommend you to others.
  • Passives (scores 7-8). Satisfied but unenthusiastic clients who are open to switching to competitors.
  • Detractors (scores 0-6). Unhappy clients who not only won't recommend you, but are likely to speak negatively about your firm to others.
Your Net Promoter Score is calculated by subtracting the percentage of detractors from the percentage of promoters. Passives are not counted except in the total sample size. Thus if you surveyed 100 clients and 62 gave you a score of 9 or 10, and 18 gave you a score of 6 or less, then your NPS would be +44. And, yes, you can have a negative NPS, and many companies do.

Now, if you're a bit skeptical of the measure, you're not alone. Many experts in the field of customer research have been critical of NPS. For example, one of the strengths of NPS is its simplicity, but that simplicity can mask very different results. If 20% of your clients are promoters and you have no detractors, that's quite a different scenario than having 60% promoters and 40% detractors—although the NPS would be the same in both cases.

Does the demarcation of the three categories give too much weight to "detractors"? It would seem to, especially when you consider that many people are reluctant to give anyone or anything a perfect score of 10. On an 11-point scale, it would seem that a score of 7 or 8 would carry more weight. Plus condensing an 11-point scale down to essentially a 3-point scale would seem to demand a larger sample size to get representative results.

But criticism aside, there's still good reason for you to consider using NPS for your firm. According to the aforementioned Hinge study, 62% of professional service buyers turn to friends and colleagues to initially identify potential service providers. Only 3% depend on the service providers introducing themselves! Referrals (and the associated perception of the service provider's reputation) also play a prominent role in which firm buyers ultimately select.

Given the significance of referrals in winning new work, why would you not want to know how many of your clients are promoters? Or why wouldn't you want to track that over time to see whether that number is increasing or decreasing? Bain has found that NPS is a strong predictor of repeat business rates, revenue growth, and profitability—despite its apparent shortcomings. The Temkin Group has also found similar correlations in their research of 19 industries.

Unfortunately, I haven't found any evidence of NPS benchmarks in professional services, much less the A/E industry. So for the time being, you'll have to benchmark against your own firm. As an internal metric, you don't necessarily have to follow standard calculation. You may prefer to use the median of scores for the how-likely-to-recommend question. But as you probably know, I'm a strong advocate for measuring client satisfaction, and some form of NPS should be part of that ongoing practice.

By the way, I just finished a client survey for one of my clients, a top-performing midsized A/E firm. They had a Net Promoter Score of 69. Can your firm beat that? You'll have to measure to find out.

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