Weighted NPS Explained by Chicago Diligence Firm

Today we want to talk about the Net Promoter Score and how it is incorrectly being used to support B2B M&A transactions.
Quick introduction: Strategex specializes in leveraging the 80/20 toolkit to help achieve profitable market share growth.
To date, we’ve generated more than $2B in incremental operating income for our clients and we have supported hundreds of M&A transactions.
I have a love/hate relationship with NPS.
When done correctly, it can be incredibly powerful.
Unfortunately, in the B2B space there is a huge blind spot in how NPS is calculated which can lead investors to make decisions that can cost them millions of dollars.
When conducting due diligence on a B2B target, it is essential to validate the strength of customer relationships and verify that the revenue base is secure. Because 70% to 90% of deals fall short of expected returns, and one of the most common causes of B2B deal failure is customer concentration risk.
If post-close a key account leaves or lowers spend, there will be a material impact on the company’s financials and many never fully recover.
NPS is an effective risk measurement tool because it helps investors determine the strength of customer relationships
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And, when NPS is combined with qualitative insights, it can also be an effective risk mitigation tool since it helps management teams understand exactly what must be done in the first hundred days post-close to secure any accounts that might be at risk.
Personally, what I love about NPS is how simple it is.
The score can range anywhere from -100 (0% Promoters - 100% Detractors) to +100 (100% Promoters - 0% Detractors).
What’s a good NPS? Well, that’s a tricky question to answer and there are a lot of different perspectives out there.
However, almost everyone would agree that an NPS of +82 is a great score. An investor considering a target company with an NPS of +82 would feel pretty good about the ability to retain and sustain the revenue base since it tells us that most customers are Promoters and that there probably aren’t systemic issues with the customer experience.
On the other hand, almost everyone would agree that an NPS of -14 is a terrible score. An investor considering a target company with an NPS of -14 would almost certainly walk away from the deal or - at a minimum - reconfigure the deal to ensure they are protected from systemic downside risk.
Now the shocking thing about these two scores is that both of them - +82 and -14 - were generated by the same target company with which we recently conducted due diligence.
How is this possible? The answer is that one score is weighted and one score is unweighted.
It turns out textbook NPS is too simple which prevents it from being a sophisticated management tool.
Textbook NPS is too simple because it does not account for revenue concentration - something that is omnipresent in the B2B world.
While the company had 213 customers in total, the top 25% of the customer base generated 97% of its revenue.
In fact, the top three customers generated almost 50% of revenue.
Conversely, the entire bottom half of the customer base - more than 100 accounts - generated less than 1% of revenue.
So if we have a handful of accounts that matter - which we call “the critical few” - and a lot of accounts that don’t matter (“the insignificant many”), why do we give them all the same weight when calculating NPS?
Think about it: When we calculate the score the textbook way, customer number 213 carries as much weight as customer one which is fundamentally flawed since customer one generated more than 10,000% more revenue than customer 213.
And, when we calculate the score the textbook way, customer one carries as much weight as customer 53, which is also fundamentally flawed even though both are in Quartile 1 since customer one generated about 8X more revenue than customer 53.
When we weight the results so that each customer’s impact on the score is proportionate to the percent of revenue they generate, NPS becomes much more representative of the state of the revenue base.
In this case, I mentioned the three largest accounts generated nearly 50% of revenue.
All of them were Detractors which drastically lowered the NPS in Quartile 1 but also the Total NPS.
And, by virtue of being Detractors, those three largest accounts are all considered to be at risk.
So next time you’re looking at a B2B NPS ask yourself: is this score telling me the story of the “insignificant many” or is it telling me the story of the “critical few?”
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