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Client promoter scores linked to heady investment returns
Companies that earn the loyalty and subsequent advocacy of their customers generate significantly higher investment returns compared to peers according to studies from the people that invented net promoter scores.
Research conducted by Fred Reichheld from Bain & Company found that an index comprising of companies with the highest net promoter score (NPS) in their respective sector – including the likes of Amazon, Apple and Tesla – returned 26 per cent per annum over the past decade, which is nearly triple the benchmark performance.
Reichheld (pictured) originally created NPS in 2002 to help firms measure customer centricity and build a culture around it. It poses a simple question to customers: on a scale from zero to ten, how likely are you to recommend this company to a friend or colleague?
Respondents who answer with a nine or ten are classified as a promoter. A response of seven or eight is considered passive and a score equal to or lower than six is a detractor.
The NPS score is then calculated by taking the percentage of promoters and subtracting the percentage of detractors. For example, a survey with 50 per cent promoters and 10 per cent detractors would yield an NPS of 40.
Speaking to The Inside Investor, Hayborough Investment Partners founder and portfolio manager Ben Rundle explains the role NPS plays as a useful indicator of high customer satisfaction.
“A score of zero is a decent baseline. Above 20 is favourable, 50 is excellent and 80 is world-class,” he says.
Rundle points to two current portfolio holdings as NPS exemplars: Aussie Broadband and Johns Lyng.
Exceptional service, exceptional returns
Aussie Broadband’s main offering is reselling internet plans to households. It is a commoditised product, with thin margins and a plethora of competitors including Telstra, TPG and Optus.
To differentiate itself, the business focuses on the customer experience. It consistently ranks first for overall satisfaction, internet speed, value for money and connection reliability.
Subsequently, over the past three years, Aussie Broadband has increased its national market share from 2.5 per cent to 6.5 per cent. In its home region of Gippsland, its market share is 21 per cent.
“If the customer is happy, the company will take market share from competitors”, Rundle notes.
Similarly, Johns Lyng operates in what should be a low-return industry. The company provides building and restoration services for insurers, typically after natural disasters or emergency events.
However, the business has built a reputation for high building standards delivered on time and on budget. NPS is embedded in managers’ remuneration framework, which encourages great client outcomes and leads to insurers increasingly allocating new work to the business.
“If you spoke to CEO Scott Didier he would mention customer and culture in the first sentence. That’s the core philosophy of the company,” Rundle says.
The Johns Lyng share price has increased 398 per cent over the past five years. Since its IPO in 2020 the Aussie Broadband share price has returned 135 per cent.
Rundle cautions that NPS alone is no panacea and needs to be interpreted as just one resource in the investor toolkit.
There is also no standardised method for conducting an NPS study, meaning results can be manipulated. He shares an example of a company that offered customers a 10 per cent discount to entice them into completing a survey.
Reichheld notes that high NPS scores alone do not indicate a loyal customer cohort. Only companies that truly enrich the lives of their customers will be successful in reaping the rewards of customer loyalty, he says.
