Do Net Promoters predict stock price growth? Reaction

We shared the Dell case study showing the apparent association between customer recommendation and stock price with Peter Hutton of Brand Energy Research writes:

Thanks for sending me this.

Yes, I am familiar with Reichheld’s NPI. Curiously enough, I developed my own advocacy scale, with a net advocacy score, 12 years ago, before Reichheld came to prominence with the book ‘The Loyalty Effect’ published in 1996, I believe.

The NPI has been much criticised not least recently by a chap called Tim Keiningham who looked at Reichheld’s own data and found that the conclusions he asserted in his book just did not follow from the data and analysis that he had used!

This did not surprise me too much since, when I was at MORI, I tried unsuccessfully to find positive correlations between net advocacy and growth (of profit, sales or whatever) and concluded it was for two main reasons:

1. It is rare, and generally impossible, to find survey data and financial data that also have exactly common fields and in sufficient quantity– e.g. time period and business unit – to run robust correlation analyses. Customer satisfaction surveys are often conducted in discrete time periods that do not correspond to the business accounting periods. Moreover, they are normally undertaken for business sub units or products/services whose financial performance is not necessarily separable from other areas of activity in the business’s accounts and/or where spending in one period is not necessarily designed to have an impact until some time later (e.g. R&D, recruitment, marketing etc).

2. What drives value creation in a business is very complex. In the long term, of course, more loyal customers will enable you to grow faster; but so too will a lot of other things – properly structured financing, favourable market conditions, weak competition, well motivated staff with the right skills, clear business strategy, effective advertising/marketing, sound leadership and management and so on. All are necessary but none are sufficient on their own to achieve outstanding performance. In that light it is no surprise that one factor – customer loyalty as reflected in the NPI – has no correlation with growth.

However, that does not detract from the value of the idea underlying the NPI. In my experience knowing that you have x% advocates and y% detractors is very important and should be a key focus for top management. But the most valuable questions, as you imply in your piece, are those that reveal what is driving your scores up or down. They are the only ones you can actually act on and are therefore arguably the Ultimate Questions.

This is what I wrote to him in response:

Thank you for this very thoughtful response. We have a lively debate on the NPI with Justin Kirby of “Connected Marketing” fame. He makes the same point as Tim Keiningham, broadly.

Fred Reichheld may have over-stated the case when he entitled that book “The ONE number you need to grow”! Clearly you need to have other things in place to execute. A company can promote warm feelings but it takes marketing professionalism to turn that into a world-beating brand.

My hunch is that online monitoring solves some (but not all) of the sample bias issues associated with using NPI off-line and that it adds an interesting additional value which is that it provides an index of

A) voluntary, spontaneous endorsement or criticism
B) explanations for that endorsement

which goes very much to the heart of what businesses are looking for when they want to create word of mouth marketing campaigns.

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