Net Promoter Score
Net Promoter Score (NPS) programs ask just one quantitative question:
“How likely are you to recommend this business to a friend or colleague?”
Net Promoter Score Definition
The Net Promoter Score is an index ranging from -100 to 100 that measures the willingness of customers to recommend a company’s products or services to others. It is used as a proxy for gauging the customer’s overall satisfaction with a company’s product or service and the customer’s loyalty to the brand.
Net Promoter Score Calculation
Customers are surveyed on one single question. They are asked to rate on an 11-point scale the likelihood of recommending the company or brand to a friend or colleague.
“On a scale of 0 to 10, how likely are you to recommend this company’s product or service to a friend or a colleague?”
Based on their rating, customers are then classified in 3 categories: detractors, passives and promoters.
‘Detractors’ gave a score lower or equal to 6. They are not particularly thrilled by the product or the service. They, with all likelihood, won’t purchase again from the company, could potentially damage the company’s reputation through negative word of mouth.
‘Passives’ gave a score of 7 or 8. They are somewhat satisfied but could easily switch to a competitor’s offering if given the opportunity. They probably wouldn’t spread any negative word-of-mouth, but are not enthusiastic enough about your products or services to actually promote them.
‘Promoters’ answered 9 or 10. They love the company’s products and services. They are the repeat buyers, are the enthusiastic evangelist who recommends the company products and services to other potential buyers.
The Net Promoter Score (NPS) is determined by subtracting the percentage of customers who are detractors from the percentage who are promoters. What is generated is a score between -100 and 100 called the Net Promoter Score. At one end of the spectrum, if when surveyed, all of the customers gave a score lower or equal to 6, this would lead to a NPS of -100. On the other end of the spectrum, if all of the customers were answering the question with a 9 or 10, then the total Net Promoter Score would be 100.
How to read a Net Promoter Score?
The basic construct of a Net Promoter Score is easy to understand, hence its popularity and widespread usage. If a company has more detractors than promoters the score will be negative and vice versa. A Net Promoter Score provides companies with a simple and straightforward metric that can be shared with their front line employees. The Net Promoter Score is helpful in that it can be used as motivation for employees to improve and to provide the best customer experience possible. The ultimate objective here is to convert customers who were less than happy or unimpressed into promoters who will put the word out and allow for increased revenues and profits.
Higher Net Promoter Scores tend to indicate a healthier business, while lower Net Promoter Scores can be an early warning to dig deeper into potential customer satisfaction and loyalty issues. Net Promoter scores are often averaging quite low. Fred Reichheld, in his calculation of 400 companies across 28 industries back in 2003 (HBR article “The One Number You Need to Grow”), found that the median Net Promoter score was just 16.
Net Promoter Score Economics
It’s clear to see how the balance of detractors or and promoters would indicate a company’s potential for success. Starting from behind, it would cost a company much more money to win back a detractor as opposed to simply keeping promoters on board. A detractor can file complaints, bog down customer service lines and will need more time and resources from the company to be served. They won’t buy more products and services from the company given their negative experience and they might very well bad mouth your brand to their peers.
The reverse is true with a customer enthusiast and promoter. They’ll buy more from the company they love, they’ll need less customer service and will refer friends and relatives. Free publicity from a promoter means the company need not spend as much on marketing and advertising! As Fred Reichheld said, “essentially promoters become the company’s marketing department.”
The Temkin Group has been doing a thorough analysis on the subject at hand. The full report can be found here: “The Economics of Net Promoter”. They found that “compared to detractors, promoters are almost six times as likely to forgive, are more than five times as likely to repurchase, and are more than twice as likely as detractors to actually recommend a company.”
Bain and Co, who originally introduced this metric, also dug deeper into the correlation between a company’s growth and its Net Promoter Score. They found that for most industries, the Net Promoter Score accounts for 20% to 60% of a company’s organic growth rate. On average, the leader in an industry has a Net Promoter Score more than double of its competitors. (You can find more on the Bain’s website: “NPS and growth”.)
Bain & Co shows on its website a partial list of companies using the Net Promoter Score system. The list is far from comprehensive but gives an idea of the Net Promoter Score popularity and widespread use. The list can be found here: Companies using NPS
How can the Net Promoter Score work for your business? And how to increase NPS?
Calculating an organization’s Net Promoter Score every once in a while is not enough in itself to bring about any longstanding value. It needs to be part of a broader ecosystem whereby the entire organization lives and breathes by it.
First off, without senior leadership sponsorship and a strong commitment to improving the customer experience, it will be difficult for any one part of the company, be it marketing, sales, operations, customer service or a customer experience team to get the necessary cross-functional adoption and accountability for the program. It needs to be a company-wide effort.
Secondly, the NPS eco-system needs to have a closed loop. Front employees need to be able to act upon real-time feedback and from insights from customers and the rest of the organization. Whether it is operations, sales, or marketing, all should be able to learn and improve from the utilization of the information obtained.
Third, the data needs to be properly analyzed. The power of the Net Promoter Score lies in its simplicity but unless a business dissects the data and figures out the root causes of its detractors’ experiences or the factors of the success that turned simple customers into promoters, it will miss out on a recipe for future growth, profitability and sustainability. For example, one is well served by reading all the comments, tagging them, classifying them and then looking for patterns. It is paramount for a company’s leadership to seek out the “whys” behind the data and to adapt and evolve accordingly.
How Medallia does it?
Medallia software not only will compute your company’s Net Promoter Score but will also answer the “why” behind the score. Medallia’s native text analytics automatically analyzes verbatim feedback, and easily uncover and quantify what your company does well and what it can fix or improve: be a product issue, a support, or a logistics issue. Medallia takes the guesswork out.