NPS As A Strategic KPI
Impacts On Customer Centricity And An Airline’s Bottom Line
As a business strives for higher accountability of its marketing actions, different key metrics are proven to link investments to company profit. One such metric, the Net Promoter Score® (NPS®), is a simple but effective tool for measuring customer centricity and predicting revenue growth. NPS plays an important role in aligning a company with the real needs of
Companies in any kind of market, industry or region face an old but nevertheless ongoing challenge when it comes to marketing investments: Do they really pay off?
In times of growing competition, liberalization of markets and changing customer wishes — not only, but in particular, in the airline industry — the key to differentiation lies in offering customers valuable, tightly calculated, exceptional services and products.
However, in contrast to fare decreases and network adjustments, the impact of investments in better services and new product features are not obvious. Because new services usually do not capture customers’ attention until they are experienced firsthand, their impact on buying decisions is not readily visible.
In addition, to receive maximum effectiveness, investments in services should be accompanied by appropriate brand image, corporate communication and, most importantly, a suitable employee response. The interdependency of these factors makes it extremely tricky to forecast specific profit increases for single investments.
As a consequence, top management is cautious about investing in service improvements (e.g., accurately evaluating the positive effects of a better seat pitch), product adjustments (e.g., making changes to the catering concept) or brand polishing (e.g., launching a social media campaign). Possible effects are not straightforward, resulting in a high rejection rate for such investment decisions.
On the contrary, the short-term effects of cost cutting, price promotions or schedule changes are easy to summarize for executives, so they prefer to make these types of decisions in these areas of business.
Keeping this major obstacle in mind, however, it is crucial that customer-centricity efforts, as well as any kind of investments to meet customers’ expectations for a more differentiated service, pass a critical litmus test in a company: Can the assumed positive outcomes to the bottom line be proven by financial accountable key metrics?
Ensuring Customer Satisfaction
Airlines constantly face growing competition and changing customer demands. Therefore, it is essential to offer customers valuable, unique products and services stand out above the competition. NPS gives airlines the ability to measure customer centricity to ensure they give customers exactly what they want and need, when they want and need it.
As long as marketing managers do not share a common language with the finance department and are reluctant to use these metrics, or key performance indicators (KPIs), they will lose influence in the company and will be excluded from the decision-making process.
A KPI that is capable of evaluating financial outcomes of specific investments to fulfill customer needs is essential when facing today’s tight budgets in the airline industry. Furthermore, accountability is critical when managers are provided with the big picture of their decisions.
Executives are aware of numerous metrics, such as customer satisfaction, customer loyalty and perceived value, that try to establish a link between customer perception and a company’s ability to profitably grow. The use of these measures is based on the same assumption: Services that are designed to be based on a high customer orientation lead to increased customer satisfaction, which results in higher customer loyalty.
The reason for this causality lies in the fact that if a company has a high proportion of loyal customers, these customers exhibit several favorable behaviors that financially benefit the company. Examples of favorable behaviors are the willingness to pay higher prices, forgive service failures to some extent and recommend the airline to other people.
As management has learned from these findings, the practice of measuring customer satisfaction is broadly employed in all industries and all competing companies. Thus, today’s managers are well aware of how their products and services meet, exceed or fall below the specific customer expectations for their company’s offerings.
Predicting Revenue Growth Via NPS
The Net Promoter Score is an effective tool airlines can use to predict revenue growth. In addition, it can help augment budgets in specific areas such as customer service, service excellence and employee training.
This knowledge is fundamental when managers want to know how their decisions are perceived by the market. It is a requirement companies must fulfill as they strive for success. However, measuring customer satisfaction alone is not sufficient for maintaining a successful company as it lacks two things: A forward-looking perspective and incorporation of competitor actions.
For example, customers may be satisfied with the current service level. More specifically, they like how the airline treats them at the boarding gate. But what happens if the airline plans to change its boarding procedure in such a way that premium customers get a faster track into the aircraft and regular customers have to wait for a while? Based on satisfaction indicators alone, we neither can forecast the appreciation or depreciation in both customer segments, nor can we evaluate the impact on customer loyalty and, thereby, on customer revenue.
Similarly, assume the airline does not change the boarding procedure at all, but its major competitor does. Can management determine what will happen to the bottom line? Unfortunately, when merely looking at current satisfaction levels, they cannot.
Because most companies do not have a monopolistic position in the markets they serve, competitive actions and investments directly influence what customers expect from a particular service. With respect to the given example, if a competitor implements the outlined new boarding process, expectations of premium customers even toward the focal airline rise. As a result, although the focal airline has not changed its boarding process, customer satisfaction with its current procedure decreases, customers become less loyal, and profits will drop.
Thus, a KPI that incorporates not only past customer experience but has a forward-looking perspective, as well as a view of competitive offerings, would be highly beneficial to companies.
With such a measure, every activity toward higher customer centricity could be linked to the financial effects on the company’s bottom line.
Net Promoter Score (NPS) is a sound answer to this call for a comprehensive measure. Because NPS asks customers how likely it is that they will recommend an airline to others, a forward-looking perspective on future behavior is given. In addition, as customers usually have only a distinct and limited relevant set of companies they consider for a specific service, NPS gives a good view on how a service and company performs in a market.
NPS has demonstrated its usefulness throughout different industries and markets. An increase in NPS significantly drives revenue growth. By linking revenue potential to investment decisions, a real return-on-investment analysis can be conducted. This gives managers a reasonable basis for making decisions. Furthermore, as NPS is capable of proving positive effects on a company’s bottom line, it can augment budgets in the areas of customer service, service excellence and employee training.
A company’s NPS scores can be compared with market average levels, as well as with specific competitor scores, giving managers a big-picture view of how their services are positioned in the market. This tells which service features customers value and which are not considered as important.
Based on this NPS evaluation, over-funded areas can be scaled back and thereby freed money should be invested in areas that lag behind. A financial tradeoff between different investment options can be done by forecasting the effects on NPS and, thereby, on profit.
However, managers that plan to implement NPS as a strategic KPI should consider doing this on a comprehensive level across the entire company, not only for marketing or customer service. Because NPS enables airlines to see any decision and any service encounter from their customers’ perspective, all respective employees and managers should concentrate their efforts solely on actions to increase NPS.
Using NPS, a company can align any activity, any brand, any service and/or any employee behavior to the real needs of customers — a strategy that will definitely pay off.