Using Emotion to Score the Next Big Opportunity

One of my favorite investment strategies? It comes from Steve, an old colleague of mine and a superb public stock investor. He likes targeting companies and industries that aren’t much liked. He then waits for them to become more liked. “Going from hated to less hated,” he says.

And there’s a single nugget of data that can help investors find those “hated” industries.

It’s one of the best ways I know of to identify the beginning of a company’s upswing.

Targeting hated industries also makes sense for early investors.

It’s the low-hanging fruit that they should not ignore.

The Customer Is Always Right

It’s no surprise that the taxi industry is hated. Protected by local government and vested interests, cabbies long ago lost interest in “delighting” their customers.

If you want to know why Uber took off the way it did, look no further than fed-up taxi riders.

Of course, taxis aren’t the only industry suffering from poor-to-abysmal customer relations. From banking to shopping, startups are all over this.

These are huge opportunities. The bigger the market, the bigger the opportunity. That’s quantifiable.

But how do you relate level of frustration to the size of the opportunity?

It begins with the premise that customer experience doesn’t happen in a vacuum. For example, if taxis treated their customers a little better, wouldn’t it be harder for disruptors like Uber to lure away customers?

And if taxis treated them a little worse (hard to imagine!), it would enhance even more the ability of invading startups to delight their customers (and hopefully light a fire under customer growth). In other words, the more frustration, the bigger the opportunity.

So here’s my hypothesis: Opportunity equals market size times level of frustration.

It’s more complicated than that, of course. But such a formula would go a long way in determining how real and how big a given opportunity is.

I decided to put my hypothesis to the test. And that meant gathering some hard data.

Tell a Friend

Net Promoter Scores measure how customers feel about a company and how likely they are to recommend the service to a friend.

Unhappy customers register from 0 to 6 on the bar below. Loyal enthusiasts give companies a rating of 9 or 10. Scores of 7 or 8 mean satisfied but unenthusiastic customers.

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An NPS score is the percentage of promoters (the 9s and 10s) minus the percentage of detractors (the 0s to 6s).

(There’s a paid version of this service, if you’re interested. But for purposes of this article, I used the publicly sourced version found here. It lists Net Promoter Scores found around the Web, with data ranging from 2013 to 2016.)

Not Feeling the Love

Let’s start with a sector under fire for putting its own interests before its customers. I’m talking about our lovable banks, of course.

Among the big legacy banks, Citibank scores a negative 41. Bank of America a minus 24. Goldman Sachs a 5. JP Morgan an 8. Morgan Stanley a 16. And Citigroup an 18.

Only Wells Fargo scores well among this group. It logs a 65 score.

Let’s look at the results for the newer fintech and peer-to-peer companies and two other industries where customers aren’t feeling the love: legacy cable/satellite TV and Internet services and their disruptors…

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Compared to the banking industry, the worst of these legacy companies weren’t as bad as the low end of the legacy banks. And the TV disruptors didn’t score nearly as high as their banking counterparts. Coincidence?

Surprising Data

What do we make of Nike’s unspectacular 30 score? Is that what paying star athletes tens of millions of dollars gets you? Online shoe retailer Zappos scores a 60, and it doesn’t have any celebrities on its payroll.

What about Tesla’s sky-high 97 score? Ford and Volkswagen both get a 28. Is it a comment on the newness of Tesla or the same old car models/business models offered by the legacy auto companies?

Going back to Uber, it has a 35 NPS. Not terrible, but given its incredible growth, I thought its score would be much higher, bolstered by legions of enthusiasts. I’d give Uber a 9. (And if it weren’t for the homeless guy I got as a driver in San Francisco, I’d give it a 10.)

Another surprise: Shopping at real stores isn’t such a bad experience after all. Wegmans scores a 61. Costco a 79. Target a 43. Walmart a 37.

All higher scores than Uber’s, by the way.

Could it be that grocery and food delivery doesn’t have the huge upside so many people assume?

Net Promoter Scores may not give us all the answers, but they do raise interesting questions about some of our more strongly held assumptions… Like powerhouse Nike could be vulnerable. As could Uber.

Who knew?

Invest early and well,

Andrew Gordon
Founder, Early Investing