Customer lifetime value: a step beyond the net promoter score
If you've ever been asked how likely you are to recommend X, Y or Z to a friend or colleague on a 0-10 scale, you have participated in an NPS survey. Since its introduction in 2003, NPS has rapidly grown in popularity, and is now not only the key measure of a customer's brand perception but also an anchor point in customer experience management. But it has its shortcomings. CLV, on the other hand, …
The rise of the NPS
The net promoter score (NPS) has been widely adopted as the preferred metric of customer satisfaction. The growth of NPS is mainly thanks to its simplicity. Respondents are grouped into "promoters" (score 9-10), "passives" (score 7-8) and "detractors" (score 0-6). By subtracting the percentage of detractors from the percentage of promoters, you get the NPS. The remaining value can be used to gauge the loyalty hat exists between a provider and a customer. NPS can be as low as −100 (everybody is a detractor) or as high as +100 (everybody is a promoter). An NPS that is positive (i.e., higher than zero) is felt to be good, and an NPS of +50 is excellent.
When a patient goes to the doctor, the doctor gathers information from several sources: the patient's description of symptoms, his or her medical records, and actual tests like blood pressure, temperature, etc. All of this goes into the doctor's diagnosis and treatment.
In business, however, entire commercial strategies are sometimes only based on one metric: the NPS. It is like a doctor would base his/her treatment only on a patient's body temperature. This is dangerous, considering its many shortcomings:
- It tempts managers to focus on their worst customers (detractors) instead of meeting the needs of their best ones (promoters)
- The "why" behind customers' scores is unknown
- Correlation with future profits is questionable
- Scores do not account for biases (e.g. "survey fatigue")
- Heterogeneity in the customer base is ignored
- It can be swayed by external factors (e.g. financial institutions in the Netherlands saw lower NPS scores in the weeks following outcry about the salary increases of ABN Amro's board)
CLV over NPS
CLV has several advantages over the NPS, none the least because it specifically identifies the high-value customers and what makes them profitable. Using CLV, a business can pin down what differentiates their best from their worst customers, what is necessary to keep their best customers happy, and – importantly – how to make average customers valuable ones. On the other side, CLV is harder to implement. It requires a sophisticated approach before operational rules based on dynamic data can be implemented.
Over the past three weeks, we shared our thoughts on how you can turn customer data into value – and customer value into profits.
More and more companies are putting "the customer" at the heart of their operations. This new center of gravity is driven by increasing market transparency and customer power (both B2B and B2C), both of which have a ripple effect to other customers and customer bases. But in our work at numerous companies and across several industries, we have seen that putting the customer first is no easy path. Focusing on customer value requires more than changing a slogan, updating the employee briefings, and making the NPS a core metric. Putting the customer at the heart of the operations is a journey in itself.