Net Promoter Score® (NPS) is a customer loyalty metric developed by Fred Reichheld, Bain & Company, and Satmetrix. It was introduced by Reichheld in his 2003 Harvard Business Review article ‘One Number You Need to Grow’, in which he tells us about the chief executives— leaders from Vanguard, Chick-fil-A, State Farm, and a half-dozen other leading companies — who had gathered to swap insights that would help them further enhance their loyalty efforts.
He says, “As part of their research into customer loyalty and growth, my colleagues and I looked for a correlation between survey responses and actual behaviour—repeat purchases, or recommendations to friends and peers — that would ultimately lead to profitable growth.” This gave birth to the concept of the Net Promoter Score.
Implementing NPS® across industries including e-Commerce, Financial Services, Healthcare, Manufacturing, and a few others, I have come to realize that NPS is not just about rolling out a survey. It is a lot more than that. There are multiple things that must be in place before and after the execution of a proactive feedback capture mechanism.
This post is a collection of all such parameters that one must take care of when implementing Net Promoter System in one’s business. I have divided this into a 3 part series.
This is part 1 of this 3 part series. In this post, I cover:
- What is Net Promoter Score®?
- Why is Net Promoter Score® important?
- Common myths surrounding Net Promoter Score®
What is Net Promoter Score®?
NPS is based on a single question, which is “How likely is that you would recommend [company X] to your friend or colleague?”
It’s a simple and a single question. It is followed by categorizing the customer into detractors (0-6), passives (7 & 8) and promoters (9 & 10).
So, clearly, the rating scale of this question is of 0-10 with 3 categorizations: detractors, passives, and promoters.
- Promoters are the respondents who have given a rating of 9 and 10.
- Passives are the respondents who have given a rating of 7 and 8.
- Detractors are the respondents who have given a rating of 0-6.
The name of the customer segments defines pretty much what the words mean. Detractors are the customers that are not happy with the experience they have had in doing business with you and they would probably bad mouth you. Passives are like the fence sitters; they would go to the competition at the first opportunity. Promoters are your brand advocates. They are like your raving fans and will talk positively about you. These customers are going to come back for business and they’ll recommend you to their friends and family.
NPS is then calculated by using the formula:
NPS = % Promoters – % Detractors
Why is Net Promoter Score® important?
It’s empirically derived
The observation is that this single question has the maximum likelihood of a customer saying that he would recommend a company and actually recommending it to his friends and folks. A research was done over multiple customers across industries. Based on information from 4,000 consumers, a variety of survey questions were ranked according to their ability to predict this desirable behavior of repeat purchases and recommendations. The top-ranking question, which was also the most effective one across industries was the NPS question – “How likely is it that you would recommend [company X] to a friend or colleague?”
It establishes accountability
It means that a customer responding as a promoter to the question “How likely is it that you would recommend us to your friends and family” is saying that he would recommend this business. Wouldn’t someone recommend a business only if they have had an exceptional experience in transacting with this business? The promoters are putting their reputation on the line. It’s kind of getting brownie points for introducing a good brand to someone else.
It is simple
It is based on a single question as mentioned above. This question is followed by a rating scale of 0-10. It is easy to understand and does not involve complex computations. So, here you classify your customers into three categories based on the score that they give on a scale of 0-10. NPS is, subsequently, calculated by subtracting the percentage of detractors from the percentage of promoters.
It is actionable
You don’t need an analyst to derive insight from all this information. Through its simple formula,
NPS = % Promoters – % Detractors, you can easily arrive at the score. This score can be computed across different geographies, product types, and customer types.However, in case of other lengthy surveys, one gets caught in complex computations to derive insights. The process in such cases is time-consuming. Further, it is difficult to make sense of this data and derive actionable insights.
It gets more responses
Since it is based on a single question, you get a lot more responses. Put yourself in the customers’ shoes and imagine yourself interacting with the multiple businesses in a day. Now, if each one of them started giving you a list of ten questions to respond to, would you even care to respond? No! However, if you see that there is only a single question, it’s highly likely that you would respond to it. That’s the simple reason why NPS gets you a lot more responses than a traditional survey.
It defines a process
NPS is not about a single question or a single number; rather, it’s about establishing a process around the number. This typically involves effectively listening to customers across touchpoints in the journey and deriving insights from this feedback. Further, brands must define projects and processes relating more to why customers like doing business with them and less with what customers dislike about the business.
It is a standardized measure across the globe
NPS = % Promoters – % Detractors.
NPS is not a complex formula to analyze. It’s all about arriving at the score in a simple manner and using that information to make an incremental business improvement. When benchmarked correctly, a brand can compare its NPS® score with multiple other organizations across the globe that use NPS® in their business.
Busting some common myths on Net Promoter Score®
Let’s look at some of the most common myths that surround NPS. Let’s also discuss quickly how we can overcome them so we can get to taking action.
Myth: It is only for large businesses. Small businesses don’t need to track NPS®.
Reality: NPS as a metric helps you understand your customer loyalty and your customers’ propensity to buy from you. Do you think customer retention is important only for large businesses? In fact, customer retention and repeat business are more important for small businesses while they are trying to establish themselves. Higher retention only means they achieve their growth goals faster.
Myth: NPS is not actionable. It’s a single question and it doesn’t give you insights to take action on your business.
Reality: NPS might not be actionable when you’re focusing only on the number. The ‘why’ that follow the NPS question is a goldmine of information. This is where you ask your customers what the prime reason for the score is. It gives you great insights to focus on and take action on. So, NPS is a lot more actionable when you focus on the why!
Myth: NPS is not correlated to financial growth. It is not a true reflection of the financial performance of a company.
Reality: This myth could turn into reality when you have not brought in purity to your number and when you have not captured the data in its purest form. For instance, if you have not ensured that there is no gaming of the system, this myth, unfortunately, could be true. Also, if you have not ensured that there is no color coding of the scale or manipulation of the formula to calculate the NPS score artificially, NPS might not be related to financial growth.
To avoid these situations, you need to make sure that you capture the NPS score in its truest essence. This blog will show you how to bring purity to your NPS score.
Myth: Net Promoter Score ignores your passive customers.
Reality: While the NPS formula does not mention passives, it still takes care of the passives in the computation process.
Let’s understand this with an example:
NPS is computed using the formula: NPS = % Promoters – % Detractors
If 100% of your customers have not rated you a promoter, then what is your NPS score? It can be anything from minus 100 to 0. This is because a percentage of your customers could have been rating you as passives. So if 100% of your customers give you a detractor rating, then your score would be minus 100. However, if say 10% give you a passive rating and none of your customers give you a promoter rating, you still have a score of minus 90.
Similarly, if none of the customers have given you a detractor rating, that doesn’t mean that your NPS score is 100; the score could range anywhere from 100 to 0. This means that if 100% of your customers give you passive rating or a score of 7 and 8, then your NPS score stills stays 0. However, if say 20% of your customers give you a passive and 80% give you a promoter rating, then your NPS score is 80.
Therefore, while the percentage of passives are not directly mentioned in the score or in the formula, it is clearly being accounted for in the formula.
Do you want to benchmark your NPS?
Sign up on this link and get access to my free Udemy course!
See what students are saying about this course: