Understanding your customers is crucial. But making business decisions solely on existing customers limits your growth potential. The importance of market research and competitive research cannot be overstated. They provide a broader perspective and deeper understanding of the business environment. Unfortunately, this is where Net Promoter Score (NPS) falls short.
The Limitations of Metrics Like Net Promoter Score
Net Promoter Score (NPS) is a popular metric, especially among SaaS marketers. Some people even say it’s “the one number you need to grow.”
That’s a dangerous misconception.
What is Net Promoter Score?
Here’s a simple explanation of how to calculate your NPS.
When a person uses a product or service, they’re asked if they’d suggest it to others.
Respondents answer on a scale of 0 to 10. Those who score 9 or 10 are very likely to recommend and are “promoters”. Those who score 7 or 8 are somewhat satisfied and are “passively satisfied”. Those who score 0 to 6 are unlikely to recommend. They’re “detractors”.
The final score is the percentage of promoters minus the percentage of detractors.
The Problem with NPS
Good and bad market research: A critical review of Net Promoter Score identifies five problems with an overreliance on NPS when making business decisions:
- It doesn’t provide direction. It may indicate that you have a problem, but it doesn’t offer insight on how to fix the problem.
- It’s focused on customer retention. Customer retention is important. But customer acquisition drives growth. NPS doesn’t offer insight into how to win new customers.
- It ignores the competition. Businesses grow by beating the competition. A metric that ignores competitors doesn’t provide enough information to drive growth.
- It isn’t customer-centric. NPS might be a good KPI if growth were the product of loyal customers. It isn’t. Growth is the product of providing a solution that best meets customer needs.
- There are no “passive” customers. A customer might not be actively promoting or denouncing your product. But they are still actively looking for better solutions.
You can sum the first four of these problems as a lack of information. NPS doesn’t provide enough information to determine what you’re doing wrong and how to fix it. Nor does it identify what you’re doing right so that you can continue to improve.
The Consequences of Overreliance on NPS
Good and bad market research highlights the consequences of this problem with an example from Oldsmobile. The company was the oldest American carmaker when it shut down in 2004.
In the years preceding its shutdown, unsatisfied customers purchased other vehicles. Satisfied customers remained. So Oldsmobile saw its percentage of loyal customers rise as revenue fell.
A Better Alternative to NPS
You won’t drive growth consistently by focusing on one metric. Instead, use a holistic approach. This approach should take into account existing customers, potential customers, and your competitors.
It’s not as simple as NPS because it’s not just one number. But businesses that focus on a single metric end up like Oldsmobile.
You need to understand every touchpoint along the customer journey. That way you can ensure that you’re checking the right boxes to win new customers and keep existing customers.
These are the basic questions you need to answer:
- What do our customers value about our product or service?
- What do our customers think we could be doing better?
- Why do our customers churn?
- In general, why do people choose your competitors?
- In particular, why do people choose your competitors instead of your offering?
Answer those questions with marketplace perception surveys and surveys of your existing customers.
Customer surveys are easier. You’ve already got your respondents and their contact information.
But there are likely many people who would be a good fit for your product or service and have never heard of your brand. There may even be people who don’t realize the product or service exists.
This approach will help you determine what you need to do to reach those people. It will enable you to make informed decisions about where to allocate resources to retain existing customers and acquire new ones.
Understand Your Customers and the Competition
There’s no one number that drives business growth. And there’s no subsitute to a comprehensive understanding of your market. Doing the work to understand your customers, potential customers, and the competition will put your business in the best position to succeed.