Startups Should Focus On Their Net Profit Score Not Potential Promoters

image001

A version of this article previously appeared in the Wall Street Journal.

“You miss 100% of the shots you never take.” Wayne Gretzky

Imagine how difficult it would be to score in hockey if you were required to rely on someone who is not your teammate to convince another third-party, whom you have not met, to take a shot on your behalf.

As crazy as this scenario sounds, it is very similar to the “scoring process” companies engage in when they track Net Promoter Scores.

If you haven't already subscribed yet,
subscribe now for free weekly JohnGreathouse.com articles!

A company's Net Promoter Score (NPS) is a beloved metric slavishly tracked and reported by product marketing and customer support executives of both established and nascent enterprises. The concept was first introduced by Fred Reichheld in a 2003 Harvard Business Review article entitled "One Number You Need to Grow."

Such scores attempt to quantify a company’s overall customer satisfaction by asking customers, "How likely is it that you would recommend our company to a friend or colleague?" The higher a company’s NPS, allegedly the higher its customer satisfaction.

There is no doubt that customer satisfaction is an important component to a company's success. However, rather than obsessing on a single metric, entrepreneurs should focus on improving their Net Profit Score. Large companies can afford to fixate on such esoteric measures, while startups must generate tangible financial results to survive. A Net Promoter Score of 100 is small consolation if your bank account score is 0.

Turning Promoters Into Profits

Shockingly, following the tactics pitched by NPS gurus could actually decrease a company's sales. As noted in Cialdini’s book, Influence – The Psychology of Persuasion, the Consistency Principle is a powerful predictor of a consumer’s future behavior. When a consumer verbalizes a future action (or inaction), it is likely that their future behavior will be consistent with their words.

Commitment is firmly established when a consumer verbally responds to an inquiry. Despite the psychology of the Consistency Principle, NPS consultants advocate assessing a company’s NPS following contentious situations, such as after a customer lodges a complaint or at the end of a technical service call.

If you ask a consumer "will you recommend us?" and they reply, “No, I will never recommend you,” you increase the chances that the user will never make a future recommendation, even if you subsequently rectify their initial complaint or concern.

Thus, startups should not ask customers their propensity for future promotions when such inquiries might result in a negative response.

Wrong Question

The indirect and passive nature of NPS questioning is problematic in the results-driven environment of the typical startup. Nascent ventures must accelerate their sales cycles. A quick “No” is far more valuable to a busy entrepreneur than a nebulous NPS response of “maybe.” Thus, rather than asking, “how likely are you…?” consider a more actionable inquiry, such as, “Will you refer a colleague to us?”

Once a customer commits to providing a referral, proactively make it happen. Ask them for the colleague's contact information. If the customer is reticent to share it, provide them with an email template they can readily forward.

Net Promoter Scores are cherished by big company executives who live in a world of death by PowerPoint. The data is easy to track and makes for great charts. However, entrepreneurs are better served by driving referrals, rather than scoring the propensity of someone making a customer reference at some nebulous future date.

Shots On Goal

Hockey fans and entrepreneurs understand the importance of a high number of shots on goal. The hockey teams and startups that take the most shots often emerge the winner. When a startup focuses on assessing the propensity of someone to make a customer reference, they are hoping strangers will score on their behalf. Successful entrepreneurs hope less and shoot more.

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet about that killer burrito I just ate.

John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

Twitter LinkedIn  

Share and Enjoy

  • LinkedIn
  • Facebook
  • Twitter

Get real world advice from John Greathouse, Subscribe Today.