The Net Promoter Score® (NPS®) is not just a buzzword anymore. It is the core of the most customer-centric organizations in the world. It is the way forward if companies want to grow, succeed, and become profitable. Here is an overview of the various aspects associated with NPS. Read on to know more about how this metric originated, how it can be calculated and why it has become the cornerstone of the most successful organizations in the world.
The birth of NPS
The main purpose of introducing the Net Promoter Score was to measure customer loyalty. Now, in today’s intensely competitive market, organizations need loyal customers. Let’s also understand that ‘customer loyalty’ is different from ‘customer satisfaction.’ While satisfaction measures how satisfied a customer is with a particular product or service, it does not guarantee that a customer would buy again from you or recommend you to his friends and family. In contrast to this, customer loyalty is when a customer is willing to not only rebuy from you but also urge his folks to do so.
In his book, ‘The Ultimate Question 2.0’, Mr. Fred Reichheld, a fellow at Bain & Company, mentions that he created this metric in order to “measure how well an organization treats the people whose lives it affects – how well it generates relationships worthy of loyalty”.
It all began at a daylong forum, where the CEOs of leading companies, such as Vanguard, Chick-fil-A, State Farm, had gathered with the motive of exchanging insights for enhancing their customer loyalty. Andy Taylor, the CEO of Enterprise Rent-A-Car, talked about a new way of measuring and managing customer loyalty. Every month, at Enterprise Rent-A-Car, the customers would be asked two simple questions – one, about the quality of their rental experience and the other, about the likelihood that they would rent from the company again.
The survey was easy and quick, allowing the company to publish ranked results for its 5,000 U.S. branches within days. By concentrating solely on the most enthusiastic customers, the company could also focus on the key driver of profitable growth: customers who not only return to rent again but also recommend Enterprise Rent-A-Car to their friends.
After two years of extensive research on the impact of Enterprise’s method on a company’s growth, Mr. Fred Reichheld published his findings in 2003 in his Harvard Business Review article, ‘The One Number You Need To Grow’.
Why is customer loyalty so important for a business?
Any organization or business owner strives to grow every day, year after year. For brands to grow massively and experience success, they must keep customers at the heart of their business. They must focus on two things – winning new customers and keeping the existing ones. However, studies show that 44% of the organizations plan their business strategies around customer acquisition, compared to only 18% of those that focus on customer retention. What the former organizations fail to realize is that acquiring new customers can cost as much as five times more than satisfying and retaining current ones. Moreover, loyal customers have the power of positive word of mouth and they bring in repeat business.
Growth by Word-Of-Mouth
Nearly 92% people choose the products or services recommended by their friends and family. If a loyal customer has a positive experience, he is more likely to share it with his friends and folks. One of the major examples of spreading a positive word-of-mouth is CrossFit, a major branded fitness regimen. Founded in 2000 by Greg Glassman and Lauren Jenai, CrossFit has grown to become a worldwide sensation – from having 250 affiliate gyms in 2007 to over 9,000 in 2014. Its customer testimonial videos give new customers a positive reason to join and the existing ones an incentive to continue, making it a multi-million-dollar brand.
Growth by Repeat Business
Loyal customers will not hesitate to spend more as they already trust your brand. They are more likely to explore and try out different products or service. They tend to make more than a single transaction, thus bringing in repeat business. Apple is a fantastic example of customer loyalty bringing in repeat business. The data collected from 5,703 shoppers by Slice Intelligence found that 85% of iPhone 6 buyers were repeat-iPhone customers.
Further, a staggering 59% of iPhone users have reported that they do so because of ‘blind loyalty.’
What is NPS?
Net Promoter Score is a management tool that can gauge customers’ loyalty just by asking one simple question –
“On a scale of zero-to-ten, how likely is it that you would recommend us (or this product/service/brand) to a friend or colleague?”
The responses recorded to this question give the company a measurement of the customers’ feelings and attitudes.
This question should be followed up with at least one question –
“What is the primary reason for your score?”
The answers to this open-ended question enable the company to know the reasons for these attitudes in the customers’ own words.
The need to create NPS
In Mr. Reichheld’s words, “The traditional surveys to measure customer satisfaction tend to be long and complex, yielding low response rates and ambiguous implications that are difficult for operating managers to act on. Furthermore, they are rarely challenged or audited because most senior executives, board members, and investors don’t take them very seriously. That’s because their results don’t correlate tightly with profits or growth”.
On the other hand, the beauty of NPS lies in its simplicity. The fact that it is short and easy to understand has made thousands of successful and innovative companies, such as American Express, Southwest Airlines, and Zappos.com adopt NPS. Moreover, it provides them with the real-time feedback on how well they are serving their customers.
How does NPS help in measuring customer loyalty?
Net Promoter is where mission meets mathematics. Mr. Reichheld wrote, “Only by systematically measuring its effect on people and their relationships can an organization gauge whether it is really achieving its mission and enriching lives”. The results of an NPS survey can help an organization assess its progress accurately. Moreover, it also helps to define the future course of action that the organization must undertake to create raving fans.
How to measure NPS?
According to the NPS survey measured on a scale of 0 to 10, every company’s customers can be divided into three well-defined categories:
- Promoters are customers who have given a score of 9 and 10.
- Passives are customers who have given a score 7 and 8.
- Detractors are customers who have given a score 0 to 6.
NPS = % Promoters – % Detractors. This score could range from -100 to +100.
Each group of customers exhibits a distinct pattern of behavior as well as a distinct set of attitudes.
Promoters indicate that their lives have been enriched by the company, making them loyal enthusiasts. They represent successes who will keep buying and referring others, thus fueling organic growth.
Passives indicate that they got what they paid for, nothing more. Such customers are satisfied but unenthusiastic. They are likely to defect towards better offering.
Detractors indicate that their lives have been diminished in doing business with the company. These customers are highly dissatisfied, disaffected, even dismayed. They represent failures, who bad-mouth the company to their friends and family, thus impeding growth and driving up costs.
Why is NPS being adopted massively?
Most of the organizations use NPS to track customer loyalty, engagement, and enthusiasm in the early stages of adoption. Gradually, they discover great value in it, if the collected data is used effectively.
It uses just one simple question and one follow up question to record customer feedback, making it very easy for respondents to understand. Thus, it gives a quick measurement of how well the company is serving its customers.
NPS being an open-source method, companies find it easy to adapt for their own needs. Further, it has proved to be a powerful engine of growth and profitability. The scores keep the employees in the organization motivated and committed to taking actions, thus driving improvements in customer relationships.
From Score to System
An organization striving for NPS success needs to realize that NPS is not just about measuring customer loyalty but also a way of doing business.
Organizations have discovered new methods to extend its impact for transforming the way their businesses run. It has become a management system. They use it to build employee engagement, keeping everyone focused on converting customers to promoters. That’s how these companies can better their results, turning NPS from a Score to a System.
The Net Promoter System was a key part of Charles Schwab’s turnaround, saving it from major fall. The CEO of Charles Schwab, Mr. Walt Bettinger, says “NPS provides the litmus test for how well we are living up to our core values.”
NPS driven companies also incorporate a Net Promoter Spirit of leadership. Such leaders believe in enriching the lives that their companies touch, making their relationships with customers worthy of their loyalty.
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Disclaimer: Net Promoter, Net Promoter Score, Net Promoter System, and NPS are trademark of Satmetrix Inc., Bain and Co., and Fred Reichheld.