Private equity investors use NPS to drive growth and investment returns

Bain Partner Christophe De Vusser described how private equity funds are using the Net Promoter approach to maximizing the value of the companies they buy.  He spoke on June 17 at the Net Promoter conference in London. Using examples from various industries, he laid out how private equity investors drive revenue sales and translate that into market value to reap above-market investment returns.

Because there is so much private equity money chasing so few deals, because the debt markets have all but dried up, and because the equity markets are not on an inexorable climb anymore, fund investors absolutely must find profitable ways to grow revenue of the businesses they acquire. De Vusser explained that there are really only two ways to demonstrate to a future buyer of a company that they can bet on its long term profitable growth. Companies can either demonstrate sustained growth in relative market share or lay out a repeatable model for growing the business through new products or new market entry. If they can do one of these two things, the fund can earn a much bigger return on its investment. The NPS approach has helped many private equity fund teams find the path to sustained, profitable organic growth for their portfolio companies.

De Vusser showed how NPS helped a plumbing fittings company turn around its market share trajectory. Bain's analysis showed that growth rates of different regional operating companies could largely be explained by differences in NPS. A ten point difference in NPS correlated with a 6-7% change in relative market share. The competitor, which had a Net Promoter Score 32 points higher than this company, was growing faster and gaining a couple of points of market share a year. With better understanding of their NPS drivers, they were able to make a handful of strategic investments to earn customer loyalty. They improved distributor results, for example, by improving the quality of their product displays and improving sales support. The in-store display opportunity was uncovered by studying Promoter accounts in one country and learning that many of them had deployed a new snazzy display of the company's products. These distributors had roughly 34% higher NPS and significantly higher sales per location, emboldening the management team to invest in rolling out the expensive new displays to all distributors with full support from the stingy private equity investors. This earned them sales from the plumbers, architects and property owners who bought from the distributors and improved their price realization. (We wrote about this company, Grohe, in a recent Harvard Business Review article, which you can find at the HBR website.)

In a heavy equipment leasing business, Promoters gave the company four times as much of their business (share of wallet) as Detractors. Learning from Promoters and Detractors what drove their leasing decisions gave them an agenda for change. Promoters differed from Detractors largely in terms of their belief the leasing company could be relied on to produce the needed equipment on short notice. As a result, the company invested in a system and processes to get forward looking information from customers that would help them better predict demand and position their equipment where it would be needed. With better "fill rates" the company was able to turn more customers into Promoters and gain share of their equipment leasing wallet.

In another company, customers who had never received a sales visit had a -35% NPS, those with one visit had a 20% NPS, those with four visits were at 56% and those with nine or more visits were back down at 38%. In other words, there was real value to more visits up to a point. Beyond that, more visits was almost certainly a sign the sales person had too much time on their hands. In fact, deeper analysis shied the sales people making too many visits were generally underutilized. They were essentially pestering the customers. This insight allowed the company to improve selling efficiency and effectiveness.  They could redeploy under-utilized salespeople to the accounts not getting enough attention, increasing the percent of accounts receiving the appropriate number of visits without increasing the number of sales people or cost of selling.

Bottom line: Private equity investors are notoriously hard-nosed and stingy. They have high standards of proof for investing. Many are now using NPS to turbo-charge returns to their investors.  They use it to help evaluate growth prospects for companies they are considering buying, and to help them decide what investments to make in growing the businesses they own.