Are Promoters Valuable Customers? An Application of the Net Promoter Scale to Predict Future Customer Spend.

Mecredy, P., Wright, M. J., & Feetham, P. (2018)

Whereas other studies focused on a more macro view of NPS and firm growth (e.g., Keiningham, Morgan and Rego, and our earlier analysis), this study looked within a single company in New Zealand.

One assumption about loyal customers is that they are more profitable and spread more positive word of mouth and are therefore worth retaining. However, there is contradictory research that shows in some cases more loyal customers aren’t more profitable (see Reinartz & Kumar, 2002, in HBR). In short, loyalty does not always result in increased spending, increased WOM, or increased profitability at the firm level. This may especially be the case with smaller companies that have fewer customers.

The authors collected NPS survey data from 2,785 customers using the 11-point LTR scale from 2011 to 2015 and then correlated this with spending data. They found their aggregated NPS score correlated with past revenue (r = .85, p = .07), current revenue (r = .70, p = .19), and future revenue (r = .91, p = .09).

When looking at only the sampled customers (not the entire company), the authors found similar positive correlation with past revenue (r = .77, p = .129) and current revenue (r = .66, p = .343), but a negative correlation with future revenue (r = -.75, p = .465).

The authors speculated that the reversal of sign for the correlation with future expenditure may be due to regression to the mean; that is, customers who buy a lot in one year are likely to think about the service more and thus recommend it. However, they are unlikely to maintain the same high level of purchases in the following year if there is a random component to their purchasing.

At an individual level the authors reported that indeed promoters spend more than passives and detractors. For each of the three years, promoters spent on average 13% more than passives and 46% more than detractors. Passives spent 31% more than detractors.

When examining data at the individual level, they found that growth comes from increasing across the whole customer base, not just promoters. The incremental growth in spending from promoters alone was much lower, although it was greater than the growth in spending from the passively satisfied customers.

Takeaway: A New Zealand’s company NPS score correlated with past (r = .85), current (r = .70), and future revenue (r = .91) when looking at all customers. Promoters spent on average 13% more than passives and 46% more than detractors, but growth was found to come from expanding sales to all customers, not just promoters. The authors concluded that even if the NPS is no better a predictor than other customer satisfaction measures, literature suggests it may still be superior from a practical perspective if it is easier to apply.

Reference

Mecredy, P., Wright, M. J., & Feetham, P. (2018). Are promoters valuable customers? An application of the net promoter scale to predict future customer spend. Australasian Marketing Journal, 26(1), 3–9. External File Link