Which Customer Metrics Best Predict Financial Performance?


Portraits of Bo Bothe and Dr. Vikas Mittal besides the podcast title
Solving for B°
Which Customer Metrics Best Predict Financial Performance?

In this episode of the Solving for B° Podcast we'll use Dr. Vikas Mital's research to help us analyze Net Promoter Score and other customer metrics. Our experts will discuss what to consider when determining which metric to use for your business and which metric is the best predictor of financial performance.

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*This transcript has been edited and formatted for readability.

Net Promoter Score and Why Businesses Use It

Chris: Today we're going to discuss customer success metrics, and their ability to predict financial growth.

Net Promoter Score (NPS) seems to be a metric that's pretty popular these days but studies have shown that it isn't the best predictor of financial performance. So why do you think people still believe it to be useful? 

Vikas: It depends. A lot of companies use Net Promoter Score for many different reasons. Part of it might simply be a herd mentality: “Company X is doing it, company Y is also doing it, so we probably need to do it, too.

Another reason is psychological comfort in situations where executives want to grow their net promoter score simply because somebody's compensation might be tied to it.

There is an inherent belief that if we increase Net Promoter Score, somehow we'll have a higher market share or higher financial performance.

A lot of depends on people’s general beliefs.

Bo: And, as with any data, the key is, “What do you want to get out of it? What is that number measuring?" It's just one number. So if you don't understand the variables that input or affect that number, then you're not going to get anything out of it. 

To Vikas's point, the challenge is not as much raising the number, as it is understanding what it is that drives it, and whether the data that comes from that is actionable.

Vikas: Net Promoter Score is typically based on what they call promoters and detractors.

Promoters are people who presumably love your company and promote it. Detractors are presumably people who hate your company who won't promote it. It's the difference between the two. But there's a large portion of people who are more or less indifferent. And you can see that in this day of mass customization and product proliferation. There isn't much differentiation so customers switch back and forth through many products.

Thus, if a company focuses only on people who love them, or people who hate them, they risk missing the big part in the middle. As an example, we just finished a study for a large oil and gas company in Houston. The management believed that the Net Promoter Score was linked to increased revenue. 

Even when we ran the numbers and found that NPS had zero correlation with their revenues, bookings, or any kind of financial metric, management still believed it would be helpful to grow their NPS score.

And that's fine. But, when I asked the question "Going forward, would you like to measure NPS score?" The answer was 100% yes. And, the reason is, “While we don't care if it predicts anything, we just believe it.”

It gives management a target that's quantifiable. And there's a lot of comfort in having a quantifiable target for them to move toward.

Bo: Times are changing. Our ability to capture data, quickly parse through it and find insights from it is so much greater.

It is so much better today than it was just five years ago. The ability to really look at data, real-time and be actionable with it is a lot easier today. I think this is a technology curve that management's trying to catch up with.

Five, ten years ago, NPS was the only way to be able to see, very quickly, what's going on. Now there are other ways that are more in-depth. But it's easier for them to latch onto that one number, and then it becomes more of a vanity number than a real predictor of success.

Chris: It seems like some companies are looking for that magic bullet – one number to almost over-simplify things. “If we get this number to X, we'll be riding high. And if it's below that, we'll just know we need to get there.” But, it's more complex than that.

Vikas: It is. Especially companies that have complex offerings, or B2B, industrial manufacturing companies. Those are a lot more complex and NPS alone will not give them the full picture.

Think about it. Management typically wants to know two things: “Is there a metric that's related to customers that can give me a sense of whether we are fulfilling the brand promise?” And, “If we are fulfilling the brand promise, we should see growth in revenue, sales, profit, EBITA, etc.” 

On the input side, companies want to know what are the big initiatives that they should be investing in to make sure they are correctly fulfilling the brand promise, focusing on those things that are important to customers and aligning their resources to that. But those things require a more complex approach than, say, latching onto one number and trying to make it grow.

Bo:  One could almost assume B2C would be more complex. Yet, the reality is, if I'm going to buy a razor, I'm going to buy a razor. But when I'm talking about a drill bit, a medical device or some sort of educational program, referrals from other people, as well as service and my job, depend on this decision.

I buy a bad razor; I throw it away. But the stakes are a lot higher on an educational program purchase that I institute in a school. It's a bigger purchase that changes the culture of my school. The stakes are higher if I use a different drill bit that ends up slowing the process of drilling a well.

Understanding what goes into the decision to buy, and the customer alignment of those things with your brand starts to matter more than, “Does this customer like me enough to refer me?

Customer Satisfaction as a Success Metric

Chris: What are some other customer success metrics? Are there some that might be better than NPS?

Vikas: If you look at 30, 35 years of research, it turns out that the best metric in this regard is customer satisfaction, for two reasons.

Customer Satisfaction Can Predict Financial Outcomes

Vikas: One is on the output side. Customer satisfaction has been shown to be the only metric that will predict a variety of financial outcomes, including sales, revenue, margin, profit, EBITA and long-term stock value. No other metric predicts all of these. 

The reason behind that is that customer satisfaction actually measures the extent to which a company has delivered on the promise that was made to the customer.

This ties directly into branding, because, when we think about branding and the gestalt of a brand, it's really the promise that we make to a customer. And, customer satisfaction measures the extent to which that brand promise gets fulfilled. That's why I believe it works so well.

Customer Satisfaction Helps Companies Prioritize 

Vikas: The second reason is on the input side. With it, a company can get a better handle on what are their priorities and their customers’ priorities that make them more or less satisfied.

If your brand is all about the product, technology or service, then you can measure satisfaction with that strategic area and link it. Customer satisfaction metrics provide the flexibility to capture the complexity of the customer's interaction, and the customer expectation of the brand. 

That's why it turns out to be such a powerful metric for managers who want to implement and get things done, both at a strategic and the ground level. 

Bo: Vikas isn’t saying that looking at other aspects of the company isn't important, only that customer satisfaction is an important metric to view the success of a company. Customers are going to refer, pay a higher price, consider you as a premium in the market, be more loyal. It is important to understand what causes those impacts and decisions. The components of that decision may be different from company to company.

Again, a lot of the metrics that we see – these one number kind of things – don't really provide you with all of those insights to where you can say, “Our response time needs to be better or our product quality needs to improve to increase customer satisfaction” which will then lead to the strategic outcome you're looking for.

Chris: Right. This speaks to the idea of a more complex number. The one number that I come up with is affected by multiple inputs. So one of the necessities for a good number that'll predict financial performance is that the metrics need to be enduring. They can't be just a fad, or just something simple or surface level.

Vikas: That’s a very important point. You can go and talk to anybody, and say, “Do you believe that businesses or customer value propositions have become simpler over time?” Almost everybody will say, no, they have become more complex.

The rapidity with which they change has become more complex and faster. Meanwhile, people can come up with the very simple number that will capture all of this complexity. That is basically a fad. So you've got to have a metric that's enduring.

In terms of fashion, why is Chanel enduring? Chanel is not a fad; it has a value that's timeless. You need a metric that is so adaptive as the business evolves that the structure around it can evolve, too.

Bo:  Southwest, is a good example. They have historically said, “We put our employees first.” That was what their brand was all based on, and their intent, to Vikas's point, was customer satisfaction.

It isn't, “We put our employees first because we want them to make a lot of money.” Or, “We put our employees first because we always think they're right."

It is “We put our employees first so that they're trained appropriately, they understand the customer and their needs, and they're happy, so they can deliver on that kind of love the brand talks about.

The tragedy that just happened with them, their engine malfunctioning and this woman dying… How will Southwest fare if they say to their customers that their value, their brand, is all about their employees delighting their customers?

Honestly, when you look at stock price and at the way people are reacting to the issue, they're not getting as beat up as another airline would for an issue like this. They're taking it head-on, they're talking about what's going on. Their executive team hasn't thrown anybody internally under the bus. They've stayed very true to their brand.

We haven't done research on it, but (I would bet) their model includes, as part of customer satisfaction, employee happiness, safety, maintenance, consistency, all those things. Now, what is the complexity of the metrics and the numbers? That's what you have to consider.

And all good brands have always been like this; it's just that now we're at a point where you can actually measure it.

The Importance of Brand Positioning

Chris: It seems like there's a focus, especially in that example, on inputs over outcomes. If you put good into the brand, that number's going to be affected. And, ultimately, that's going to drive your stock price.

Vikas: Well, it's subtler, in the sense that there are a couple things that happen. In a theoretical world, a company could be excellent at everything. So you want to be excellent on safety, service, quality and you want to charge a lower price.

But that's not possible for a company. A company, in effect, has to choose what are the one, two or three key inputs to its brand promise, and prioritize on that.

“How much weight should we give on customer service? How much weight should we give on safety? How much weight on comfort? That is the thing that helps a business become profitable over the long run.

We see this time and time again. Companies that try to be everything to all their customers all the time, their promises become so diffused that, eventually, customer satisfaction declines.

Bo: At that point, there’s no brand. It's like a person that tries to be everything. You can't really put them in a box, so you don't really know what to do with them. You can't respond to them appropriately or use them the right way.

I've got a hammer, and it nails things really well, but I want to use it to take out nails. Well, okay, it does those two things really well, but what if I wanted to screw something in with it? If you tried to make it do all those things, there's a point where the utility of that hammer isn't as good. It's the same thing with a business.

Vikas: Bo and I got to work for a large waste management company. They were trying to be a lot of different things. When we did some work with them, our models showed that the three things that they needed to focus on were basically better pricing, billing and services, and after-sales service.

Those were the only three things customers wanted, but instead, they were investing money in many different initiatives. It's not that we asked them to spend more money. We said, “Just take your existing budget, and reallocate it.

A similar thing happened with another company that was focusing too much on technology. When we started working with the customer satisfaction data, we found that their customers wanted better project management.

They took some budget out of technology and focused on project management. Eventually, they started to see stronger scores on their brand and customer satisfaction. 

The Role of the Brand Promise in Choosing Customer Success Metrics

Chris: In the example you just gave, there were three specific areas that they had to focus on. It sounds like these are smaller data points or inputs that we need to consider as we're determining which metric is the best fit for our organization. Is that fair to say?

Vikas: Yes, that’s pretty much what we’re saying.  You need a metric that's enduring and flexible, that captures the complexity of your business. It should link to your brand promise. And we have seen in our work that customer satisfaction is such a metric. 

It has all these desirable properties so it allows to you look at the hard quantitative data that companies want, the softer things, the non-quantifiable aspects of a brand, and with that, give good guidance into how to prioritize resources.

Bo: And then it focuses that effort on the customer. In the end, they're going to drive value. Cost-cutting, making people do a certain thing, proving your product quality, adding technology, these all work to a certain point, but not for everything.

What happens if a customer's not happy? And, that's where I think the fallacy of Net Promoter Score is: it’s not that they're not good numbers, it just doesn't measure the complexity of how your brand reacts with your customer. And this is the key to making these numbers more effective for leadership.

You need to focus on why customers are satisfied, how that impacts your profitability and the way it works. That's the key thing. And the “why” is the most important piece to it. That's what Vikas has been talking about. With the research he's been doing for years, this is what he's finding.

The Danger of Too Much Customer Satisfaction

Chris: We talked about customer satisfaction as a good predictor of financial performance. Is there a caveat to that? Is it more customer satisfaction is always better? Or, is there a threshold?

Vikas: More is not always better. We've done a lot of work in this area, and in one of the big studies, we looked at B2B companies, and found that in a seven-point scale, the sweet spot is around six. Beyond that, it takes a lot of effort to make the customer more satisfied, and it doesn't result in the same amount of loyalty.

So if you try to over-satisfy your customers, your sales may go up, but your margins and EBITA will dip because you're spending way too much money to get that little extra juice on satisfaction.

Chris: Right. It's a point of diminishing returns.

Well, I think that pretty much covers the topic for today, guys. I really appreciate you taking the time to share some of your insights.