Net Promoter Score (NPS). Daunting? Technical? Not really. Let us simplify it a bit because there is a huge advantage in knowing, understanding and applying the NPS.
- The NPS was devised in 2003 by Fred Reichheld, a partner at Bain & Company and also the author of The Ultimate Question
- It is always expressed as an integer and not a %
- It is a customer loyalty metric
- The maximum range of a NPS is -100 to 100. -100 in the event that every customer is a Detractor and 100 in the event that every customer is a Promoter.
How does NPS work?
“How likely is it that you would recommend this company to a friend or colleague?” A commonly asked question in feedback forms and surveys. Customers are generally required to provide a rating on a scale of 0-10. The answer to this question is a clear indicator whether the customer is a Promoter, Passive or a Detractor. The ratings are categorized based on these classifications –
- Detractors are customers who are not too pleased with the brand and are very likely to publicize the brand negatively. These customers rate the brand between 0-6.
- Passives are in between. Customers that are satisfied but not staunch supporters of the brand. They are likely to be influenced by other brands in the same space. They rate the brand between 7-8.
- Promoters are loyal customers and are most likely to make a purchase again and also refer others. Their rating falls between 9-10.
How is NPS calculated?
NPS = (Promoters — Detractors) / (No of Total Responses) * 100
Example: A survey was conducted and 100 people responded.
20 were Detractors (0-6 range)
30 were Passives (7-8 range)
50 responses were Promoters (9-10 range)
NPS = (50-20)/100 * 100 = 30
How to use NPS?
Calculating the NPS is the easy part. What next is when theory is put into practice. So you have the NPS which is indicating that something is going wrong or right. So how do you fix the wrong and go on with the right. For this you need to know what kind of product or service led to the final customer ratings. Thus it is always advised to follow up this question with a Why i.e. “How likely is it that you would recommend this company to a friend or colleague? Why?” The Why will help you zero in on the factors that need to be fixed. This will lead you to the root cause and help improve your NPS score.
NPS scores can also be compared with benchmarks i.e. NPS scores of other players / companies in the same space. This always creates a competitive yet healthy environment in which brands work towards better scores that determine their performance in terms of customer relationship, which in turn translates to long-term profitable growth.
Why bother using NPS?
NPS helps quantify customer word of mouth. It is a reflection of how the brand has fared in the eyes of the target audience. Considering how important all of this is let us see why the use of NPS in analytical decisions is imperative –
It is a uniform and standardized measure of customer loyalty.
It is very simple, quick and easy to calculate and quantify.
It helps set an internal and external benchmark which helps your brand to compare its performance with itself and other companies with similar objectives.
Why NPS may not work for some?
The perfect customer loyalty metric. Too good to be true? Probably. It all depends on what purpose you expect it to serve from an analytical perspective. But it is best to know the downside to any concept before you apply it or buy into it.
The feedback question (How likely is it that you would recommend this company to a friend or colleague?) is worded ambiguously because it refers to a company as opposed to a specific product or service. A customer while answering the question may not relate to the company as a whole especially if they have had limited exposure to its product line and thus the answer may turn out to be vague or inaccurate.
NPS is a relative concept. It only makes sense when compared to another NPS. Could be of the same brand over varying periods of time or different brands over the same period. It is not too effective as a stand-alone metric.
NPS is based on certain underlying data which may prove easy to obtain for a specific category of products while customers may not be too keen to comment on their preference for some other category of products. For instance customers may be a lot more forthcoming to provide feedback for electronics, fashion, restaurants as opposed to products of daily use such as soaps, detergent, toothpaste etc.
The NPS scale 0-6 Detractors, 7-8 Passives and 9-10 Promoters is rather arbitrary. A uniform scale would prove to be a better indicator of the responses i.e. “very to recommend against,” to “neutral,” to “very likely to recommend for”.
A lone NPS as the final outcome can be very deceptive. If two companies have the same NPS one may assume they reflect the same level of customer satisfaction. This may not be the case especially since the Passives no is not used to arrive at this metric. Eg. A NPS of 40 can be arrived in many ways. 0% Detractors, 60% Passives and 40% Promoters. 20% Detractors, 20% Passives and 60% Promoters.
Conclusion: Considering both the pros and cons, the NPS is extensively used by well known trusted brands.