Net Promoter Score (NPS)

The concept of the net promoter score (NPS) is quite simple. It starts with the customer experience. Positive customer experiences lead a customer to become loyal. Customer loyalty can manifest itself in multiple ways, for example as increased customer lifetime value—how much a customer spends with the company over a given period of time—or in the shape of a referral—new business gained because of the positive message that an individual customer shares via word of mouth. Conversely, when the customer experience is poor, loyalty will be low, which in turn results in low purchasing value, as well as a potential loss of business due to bad word-of-mouth messages. The net promoter score (NPS) provides a framework to quantify this customer behavior. The higher the number, the greater its impact on the bottom line of a business. Figure 5.1 shows the effect of NPS on income growth in the airline industry.


Figure 5.1: Net Promoter vs. 5-year Revenue Growth Rate for US Airline Companies
Source: SATMETRIX

As the figure shows, in last five years, companies that maintained higher net promoter scores also grew faster than companies whose net promoter scores were low. For example, Southwest Airlines, with a net promoter score of 60, grew at a rate of 15 percent in comparison with American Airlines, which has a net promoter score of only 17.

Statistics aside, the net promoter score (NPS) makes sense on an intuitive level. When customers are truly loyal to a company, their relationship changes from a simple exchange of product for money to a long-term commitment, despite price increases and/or occasional errors. A truly loyal customer also recruits new customers through positive word-of-mouth recommendations, which results in income growth for a company.

So, once you have customers, the goal is to increase the Net Promoter Score promoters!

Calculating the Net Promoter Score

The net promoter score (NPS) first gained momentum when Fred Reichheld’s breakthrough paper titled “The One Number You Need to Grow” appeared in the Harvard Business Review in 2003. In just a few years, the NPS has been widely adopted by Fortune 500 companies like Apple (NPS = 79), Adobe (NPS = 46), Google (NPS = 73), DirecTV (NPS = 20), Verizon (NPS = 10), and American Express (NPS = 47). There have been some controversies regarding the way it is calculated. Everyone, however, agrees on the utility and simplicity of the net promoter score concept, so I say don't let the perfect be the enemy of the good. If you don't like the NPS question or the scoring system as suggested by Reichheld, feel free to use your own. Any reasonably neutral approach will give you valuable data. Using the standard approach, however, will provide you with an opportunity to benchmark your efforts against the industry and/or world-class companies.

Calculating the NPS is quite simple. It is a three-step process, defined below:

Step 1: Ask the NPS question

Design a survey to ask all your existing customers the "Ultimate Question" i.e., How likely are you to recommend us to your friends and colleagues? The answer should be collected on a scale of zero to ten, where zero means least likely and ten means most likely.

While designing this survey, the most challenging part is to resist the temptation to collect a lot of information. I suggest that if you really have to elaborate, add just one more open-ended question: "What’s the one thing that we could do to improve the score you gave us." Or ask, "Why do you feel this way?"

Step 2: Invite people to take the survey

Depending upon the business you are in, devise a consistent formula to invite people to take this survey. For example, if you are selling to consumers you can use a lottery mechanism to ask this question to X number of randomly selected customers in a day and then ask the same question after a quarter. Similarly, if you are selling to businesses you may ask this question as a part of your invoicing, fulfillment, or servicing routine and then reach them once every six months.

Step 3: Calculate the NPS

Categorize customer responses in three buckets:

  1. Promoter – Customers who give a score of 9 or 10. These customers are loyal enthusiasts who will keep buying and refer others, hence fueling your growth.

  2. Passive – Customers who give you a score of 7 or 8 are satisfied but unenthusiastic. They are vulnerable to competitive offerings.

  3. Detractors – Customers who give you a score between 0 and 6 are unhappy customers who can damage your brand and impede growth through negative word-of-mouth.

To calculate the net promoter score of your company, simply take the percentage of customers who are promoters and subtract the percentage of detractors. Figure 5.2 shows this calculation visually.



Figure 5.2: Calculating Net Promoter Score (NPS)

Knowing the NPS of your business is a wonderful first step, however, its real value is that it provides actionable information on which you can create targeted initiatives to grow your business. For example, for promoters you can devise new tools to help them promote your offerings such as social networking and community tools, or you can offer special reward programs so they can buy more. You can create creative programs for passive customers to make them promoters e.g., a campaign like "buy one and your friend will get one for free" will encourage passive customers to buy and promote your product. Or you can invest your energies in understanding the concerns of your detractors, uncovering the problems that are stopping them from loving your offerings. Fixing those problems will boost your business.

Doing all of this requires that you look at businesses from the inside out.

Related:

Reference Material:

  • The Ultimate Question by Fred Reichheld
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