Net Promoter Score (NPS): What, how, and why
This article focuses on the explanaition of the Net Promoter Score. We will define 1) what is the Net Promoter Score (NPS), 2) how Net Promoter Score works, and 3) why Net Promoter Score so important.
WHAT IS THE NET PROMOTER SCORE
The Net Promoter Score can be termed as an index that ranges between -100 to 100. This index measures the customers’ willingness for recommending a specific brand’s products and services to others. In other words, the Net Promoter Score can be termed as a proxy that gauges the overall satisfaction level of a customer concerning a product or service launched by a company. This score also gauges the customer loyalty to a specific brand or company. The idea of the Net Promoter Score is based on the perspective that every company’s customers can be split into three categories namely; the detractors, promoters, and passives. Following is a complete insight on each of these categories.
Detractors are those groups of customers, who give a rating lower or 6. This group of customers is not satisfied with the kind of service/product offered. It is pretty likely that these individuals would not purchase the good from the company again. This group of customers can also damage the reputation of the company with their negative verdicts.
Passives are those groups of customers who rate the product 7 or 8. These individuals are relatively satisfied with the product, but they are also not entirely loyal to the brand. They group can always switch to a competitor if better opportunities and services are provided. Although they won’t give negative verdicts on the product, they also won’t be enthusiastic enough to promote the products.
Promoters are those groups of customers who rate the product 9-10. They are particularly fond of the products and services of the company. They are repeat buyers, and they also recommend the company to potential buyers.
History of Net Promoter Score
All companies aim growth, profitability, and sustainability. However, this holistic growth is only possible when customers recommend a product or service to prospective buyers.
Most of the leaders want their customers to be entirely satisfied with the product. But then, it is indeed a challenge to figure out how the customers are feeling. It is also quite difficult to establish accountability for the experience of the customers.
The traditional customer satisfaction surveys won’t work in this regard, as the results are not published in a timely and individualized manner.
Due to this reason, a couple of years back in 2003, Fred Reichheld and the Bain team came up with a research project in order to determine whether a newer and varied approach would turn out to be more fruitful in this regard. They worked with the data supplied by Satmetrix and tested a series of questions to determine customer behavior. This eventually led to the development of the NPS score system.
The team of Fred and Bain came up with a novel way of determining how good a company treats its consumers. They determined how well relationships were developed from loyalty and satisfaction. This methodology could be applied by anyone, and it came to be known as the Net Promoter Score.
With time, this methodology has been improved, developed and expanded. The use has been extended beyond the customers to build an engagement and commitment among the employees. The newer methods not only broadened the impact of the system but also transformed the organizations as a whole.
HOW DOES THE NET PROMOTER SCORE WORK?
Net Promoter Score Metrics
Net Promoter Score gives a clear view of the company’s performance according to the customers’ perspective. According to the Bain analysis, the companies that provide sustained value to their customers achieve long-term profit growths. These companies have the NPS two times more than the average companies. The Net Promoter Score metrics can be determined in the following ways;
- Economics of the NPS system
The Net Promoter Score can be, measured/calculated by following these five simple steps.
- In order to start with the calculation, the questionnaire of the Net Promoter Score has to be sent to your target demographic (customer group).
- The survey responses from this questionnaire have to be downloaded and collected in an Excel spreadsheet.
- In your spreadsheet, you will now have to identify the responses as detractors, passives, and promoters. This can be done by adding the entire section of responses from every classification.
- You will now have to generate the total percentage of each group. This can be done by taking your group total and dividing it by the entire number of survey responses.
- After this, you will have to subtract the percentage of the total number of detractors from the percentage of total number of promoters. This will give your NPS.
Example: Let’s assume that you’ve received 100 responses in your survey.
- 10 responses were from detractors;
- 20 responses were from passives;
- 70 responses were from promoters.
On calculating the percentages of every group individually, you will come up with 10%, 20%, and 70%. You will now have to subtract the score of detractors, i.e., 10% from promoters, i.e., 70%. This will result in 60%. As a Net Promoter Score is always represented in integers, your NPS will be 60.
The basic idea of a Net Promoter Score is easy to comprehend. Due to this reason, it is widely popular and extensively used. If a brand has more detractors than promoters, then its score will automatically be negative and vice versa. The Net Promoter Score provides a company with a simple and easy to understand metric than can be shared with the company’s employees. The NPS generated turns out to be extremely handy for motivating the employees and improving/providing exceptional customer experience. The main idea here is to change customers who were initially unhappy or dissatisfied into promoters who will not only be satisfied with the service but will also recommend it to one and all. This in turn will increase the amount of revenue/profit of the company in the long run.
Higher and better Net Promoter Scores indicate great business while the lower scores turn out to be the early warnings for digging deeper into the prospective customer satisfaction and issues of loyalty. According to research, the average Net Promoter Scores are relatively lower. While calculating the scores of 400 companies in 18 industries, Fred Reichheld observed that the median Net Promoter Score was merely 16%, which indeed is shockingly low.
Economics of the NPS
With the interpretation of the NPS, it is quite clear to check how the balance between the detractors and promoters would indicate the potential of a company. If we start from behind, we will notice that it is likely to cost a company comparatively more money to win the trust of a detractor than to keep the promoters satisfied. Detractors can file several complaints or even bog down the lines of customer service thereby exhausting more time and resources from the company. They wouldn’t buy any more services and products from your company, and this negative experience can affect your brand to a great extent.
Exactly a contrary situation would occur with a customer enthusiast or a promoter. They are likely to buy more from their preferred company, and as they are satisfied with the services, they might also require fewer customer services. The best part: these individuals will recommend your services to friends and acquaintances. In other words, free publicity and recommendation from a promoter will mean that the company needn’t spend as much money on marketing and advertising. According to Fred Reichheld, promoters become a part of the company’s marketing unit.
A thorough and holistic analysis of this subject was being conducted by the Temkin group. According to them, the promoters are way better for the company than detractors. Compared to the detractors, they are likely to forget six times more and are also likely to repurchase five times more. They also have higher chances (almost double) of recommending a company compared to the detractors.
Bain and Co., the ones who developed this metric have also profoundly studied about the correlation between company growth and the Net Promoter Score. They have observed that for most of the industries, Net Promoter Score turns out to be 20-60% of the organic growth rate of the company. In an average, an industry bigwig is more likely to have its NPS double than its competitors.
On its website, Bain and Co. have a partial list of all those companies that are availing the scoring system of the Net Promoter Score. This list may not be quite comprehensive, but it does give a proper idea about the popularity of the Net Promoter Score and also its widespread use.
NPS & growth
NPS is a good indicator of a company’s growth. However, the relationship between NPS and growth is stronger in some industries and weaker in some other. The relationship is strongest when;
- The industry has a good number of players, which gives customers a real choice.
- The effects of the network are minimal, thereby allowing customers to switch easily between their providers.
- With the extensive adoption and use of the various products and services, the industry is mature.
The relationship between Net Promoter Score & growth is weak and inconsistent in all those areas where these conditions do not hold.
WHY IS THE NET PROMOTER SCORE IMPORTANT?
Benefits of Net Promoter in comparison to other customer measurements
Net Promoter Score comes with several benefits compared to other top-notch units of customer measurements. Some of them are listed below.
Simple interface – The NPS surveys hardly require 2-3 questions. Thus, the burden of answering is quite low on the customers. On top of that, there is a specific ‘likelihood to recommend’ question that only has to be rated on a scale of 0-10. The customers won’t have to delve into the complex and incomprehensible indices or correlation factors. The NPS is a simple and single number that can be tracked on a weekly or monthly basis just like the net profit. Just like the net profits, the NPS can also be divided into your required sections. It can be divided by brand labels, stores or even products.
Easy-to-operate – This is another remarkable feature of the NPS surveys. These surveys can be easily conducted via phone, email or even web servers (whichever is faster and comes up with more valuable data). The scores can also be complied and posted quickly, which allows people to check the results of their performance in a proper and timely manner.
Prompt follow-up – The ones collecting the NPS share the customer feedback quite promptly, right after it is received. They immediately ask the managers or the top level employees to contact the customers who have given unfavorable scores. These customers are contacted, their concerns are noted and their problems too are fixed according to the urgency. The managers and senior leaders use the data of the Net Promoter Score and the customer comments for informing decisions about the changes in the processes, the newer advent of products and other additional innovations.
Extensive experience – Numerous companies from varied levels of industries have now started measuring their NPS since the last few years. In fact, a couple of leading companies have also adopted the entire NPS system. Many of the practitioners also share their individual experiences via the NPS loyalty forums.
Adaptable – NPS can be easily adjusted to several multiple business settings. Thus, it also scores high concerning adaptability. The networking bigwig Apple too uses this in their retail stores, American Express after they’re done with the important service calls. Logitech, a popular computer peripheral manufacturer, also uses this system for assessing what the customers think about every Logitech product.
Uses of the Net Promoter Score
Besides these high-end benefits, Net Promoter Score also comes with some additional uses. They are listed below.
- These surveys give an idea whether the users are willing to be contacted in the long run.
- The users are automatically sorted into panels called ‘detractors’, ‘passives and promoters’.
- The surveys are tailored to the group’s interests, and each of these surveys is conducted from time to time.
- The NPS helps in determining why the respondents feel a specific way as they do.
- The changes can be tracked from time to time.
- The problems can be corrected and capitalized on the basis of successes.
- Meaningful and good relationships can be built with the customers, and their perceptions about a brand can also be completely changed.
Net promoter score and customer loyalty
While asking your customers a couple of questions for determining the Net Promoter Score, you are ‘actually’ asking them whether they are taking the time to give positive feedbacks about your company or a brand. Nowadays, individual opinions and word of mouth spread faster than anything else, so there’s indeed a profound relationship between the NPS and the customer loyalty.
Checking your NPS is the easiest and the best way to see how your company is turning out to be in your customers’ eyes. In most cases, the positive Net Promoter Scores have showed stronger customer co-relations and better and profitable growth. The organizations and companies ranging from both the small start-ups to entrepreneurial bigwigs also use the NPS in order to assess customer satisfaction and track customer performance because it is simple, quick, benchmarkable, standardized and also quantifiable.
Why Net Promoter Score matters for your business
Net promoter score is a great way to determine the profits from your business. But that’s not all. Following are some more reasons suggesting why the NPS matters for your entrepreneurial house.
- The NPS plays a significant role in measuring, viewing and building customer satisfaction. It makes the companies realize that simply measuring the customer satisfaction is not enough. They have to go an extra edge in understanding how loyal, satisfied and happy the customers are. It lets you determine customer loyalty concerning proper business outcomes.
- It makes the challenging job of customer satisfaction easy. As you can track the results of your posted strategies, you will understand whether the strategy is working or not. In case it is going on the lower side, you can always get it replaced with another strategy.
- By using the NPS, you can enjoy more customer promotion. You come across promoters, who do the marketing for your company for free. These promoters can also be used to recommend your company to prospective clients.
- Businesses get the opportunity of asking more questions, and they also get the chance to delve deep into the customer problems. This not only fixes the problem swiftly, but it also makes the entire job quick and less hassling.
- Detractors can ruin the reputation of your company. So, by using an NPS you can always reduce the percentage of these detractors to grow and expand your business.
- You can also use the NPS for driving customer growth and boosting the value of customer lifetime.