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Performance Metrics: Which one to choose?

Introduction

Anyone running a business nowadays must be confused by the number of metrics that are promoted as the Holy Grail. To some the Net Promoter Score is the ultimate question. But what about good old customer satisfaction scores; are they redundant? In 2010 the Harvard Business Review published an article promoting a question that asked about the amount of effort required to do business with a company – and the Customer Effort Score was born. And then there is the Net Value Score – what is that all about?

Performance metrics
Figure 1

Why Do We Need Metrics?

It is worth stepping back for a minute and considering why we need metrics at all to run our businesses. Metrics are like the dials and instruments in our cars. Imagine for a moment that we were forced into a situation where our car has only three dials on the dashboard; which dials would we want? Certainly it would be important to have an odometer for otherwise we wouldn't know how far we have travelled and therefore we wouldn’t know how far we are from our destination. The odometer is the equivalent of our sales figures, which tell us what we have achieved over a period. Secondly, we would need a speedometer for otherwise we wouldn't be able to calculate how long it will take us to arrive at our destination. This is the equivalent of our gross margin that tells us how we are doing in very basic terms. And, thirdly, we would need a fuel gauge in order to tell us how far we can go before we run out of gas. This is the equivalent of the cash in the bank.

These three measures of sales, gross margin, and cash need to be constantly reviewed in our search for profits. Indeed, if we had to survive on only one of these measures (hopefully for only a short period of time), it would be with the cash figure – the fuel in the tank.

However, these are financial metrics which have been around for a long time and are essential measures in any business. This takes us back to the question posed at the beginning of this note – what is the best measure of general business performance?

Business Performance Metrics

Measures of general business performance rather than financial performance are relatively new and they are jostling for position.

The one that has been around the longest is the customer satisfaction score. It goes without saying that a business needs to keep its customers satisfied for otherwise they will defect. Exactly how we measure customer satisfaction is up for debate. Most companies use a ten-point scale which seems to fit with how we measure most things in life.

The importance of customer satisfaction is obvious but the link with profitability and company performance is a bit more tenuous. In the early 1990s Professor Heskett of Harvard University proposed a link between happy employees and a healthy financial performance. His argument in The Service Profit Chain was that there is a causal link between profitability, customer loyalty, employee satisfaction, and productivity. He opines that growth in sales and profits is stimulated mainly by customer loyalty, and loyalty is a direct result of customer satisfaction. Satisfaction is largely influenced by the value of services provided to customers. The whole virtuous circle leads to greater profitability for a company.

Customer satisfaction is still a vital metric to any company. If we measure overall satisfaction as well as satisfaction with individual parts of the offer, we can correlate the two sets of data and determine what is driving the overall figure (we derive the importance of the metrics). In this way we can point to the parts of our value proposition that are strong and need maintaining, and to those which need immediate attention. Figure 2 below shows that A,F and B are priorities for improvement as they are important in driving satisfaction and the satisfaction scores are low relative to other parts of the offer. Equally, items C and D are achieving high levels of satisfaction but are not driving overall satisfaction and therefore should not receive a high level of investment.

Performance metrics
Figure 2

The Net Promoter Score, developed by Fred Riechheld of Bain & Company, brought the focus onto two parts of the measurement scale that are important. The question he proposed is “how likely would you be to recommend company X to a friend or colleague?” In reality, the overall score resulting from this question is very similar to what is achieved in answer to the overall satisfaction question. However, the NPS score focuses on two proportions of the sample response – those who give a high score of 9 or 10 as their likelihood to recommend, and those who give a score of 6 or below. Scores of 7 or 8 are considered neutral and are ignored in the calculation. By subtracting the detractors (scores of 6 or below) from the promoters (scores of 9 or 10), we arrive at the net number of promoters.

A typical business-to-business company (is there such a thing?) achieves a Net Promoter Score of around 20 to 25. Scores of 40 or more are considered exemplary and a strong indicator of high growth with good prospects of future profitability. This “golf handicap” metric has been adopted by many boards of companies who want a simple measure of how their company is doing. The NPS is easy to understand and is a good benchmark against which to judge a company’s performance.

If you had to choose just two general performance metrics, overall satisfaction and the Net Promoter Score would be high on the list.

The Customer Effort Score also may be relevant, especially for certain products and services. If we are buying a new airliner for our fleet, we expect a good deal of effort will be required in the purchasing process. However, for many business transactions they are at a lower level and we expect our suppliers to be easy to deal with. Some are not and the amount of effort that we have to put in can be a serious detraction from doing business. It can be enlightening to ask a question on how much effort is required to buy from a company.

We live in a competitive world and so it is not enough to know how we are performing in absolute terms; we also need to know how we are performing in relative terms. This means that the questions we ask about our own company as regards overall satisfaction or the Net Promoter Score should be repeated for companies in our competitive set. This can make interviewing tedious since the same question has to be repeated time and again for different companies. A simple way of overcoming this is to use the Net Value Score, which is derived from two questions framed as follows:

  1. How would you rate COMPANY X on the product or service benefits the company offers, compared to the product/service benefits offered by other suppliers of similar products/services?
  2. How would you rate COMMPANY X on it's prices, compared to the prices of other suppliers of similar products/services?

Answers to these questions enable us to plot a company on the value equivalence line (Figure 3).

Performance metrics
Figure 3

This paradigm is useful in telling us whether a company is offering more or less value for money than others in the marketplace. It is a good indicator of future growth and potential actions. For example, company C in the diagram is offering more benefits than companies A and B and is in a position to carry on with its current pricing strategy and increase its market share, or raise its price and collect more profits.

Concluding Words

The conclusion we arrive at is that metrics are a vital tool for helping us run our businesses. However, metrics deliver different intelligence and should be chosen to meet different objectives. The table below summarizes how and where the metrics discussed in this paper should be used.

Metric Question Where to use it
Customer Satisfaction Score On a scale from 1 to 10 how satisfied are you with company X? Determines strengths and weaknesses of a company on different aspects of its customer value proposition
Net Promoter Score On a scale from 1 to 10 how likely would you be to recommend company X? Establishes loyalty to a company and is an indicator of its growth and profitability
Customer Effort Score On a scale from 1 to 10 how much effort is required to do business with company X? Indicator of ease of doing business and future market share
Net Value Score How would you rate company X on its products or services compared to other similar suppliers? (And similarly how would you rate it on its prices?) Positions a company on the value equivalence line