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Net Promoter Scores: Revisited

It has been nearly six months since we last discussed Net Promoter Scores (NPS) in one of our Intelligence reports. Our report initially made the case against NPS, drawing upon a study that concluded that NPS was unable to forecast sales growth, operating cash flow, market share, shareholder return, or gross margin.

Despite refuting the controversial customer loyalty metric as a leading financial indicator, we at Neudata still continue to receive interest from a significant number of institutional investors for NPS datasets.

In response, we revisit the topic and discuss a 2018 academic paper that investigated whether NPS could be predictive of consumer spending and company revenue.

SETTING THE SCENE

Reicheld, the creator of NPS’ entire basis for the metric being an accurate measure of revenue growth was predominantly supported by two hypotheses:

  1. Positive word-of-mouth recommendations from loyal customers helps acquire new/potential customers
  2. A company’s existing base of loyal customers would increase their spend in the future due to satisfactory service in the past.

These two claims have been challenged by researchers, who discovered that Reicheld’s analysis was in fact correlated with past revenue growth rates rather than current or future growth rates.

A 2018 study by

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Author

Chashaka Wimalaweera Analyst (Asia)