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What Is NPS and Why Should I Care?

I get this question frequently from emerging growth CEOs – especially SaaS CEOs. You should know your net promoter score. It can impact your valuation and is a good indicator of how your customers view your service and value. There are limitations with NPS so use it as a directional guide. The village idiot definition of NPS is shown below. If you would like help in calculating a NPS for your business, feel free to contact me.

 

Net Promoter or Net Promoter Score (NPS) is a management tool that can be used to gauge the loyalty of a firm’s customer relationships. It serves as an alternative to traditional customer satisfaction research and claims to be correlated with revenue growth. Net Promoter Score is a customer loyalty metric developed by (and a registered trademark of) Fred Reichheld, Bain & Company, and Satmetrix. It was introduced by Reichheld in his 2003 Harvard Business Review article “One Number You Need to Grow”. NPS can be as low as -100 (everybody is a detractor) or as high as +100 (everybody is a promoter). An NPS that is positive (i.e., higher than zero) is felt to be good, and an NPS of +50 is excellent. Net Promoter Score (NPS) measures the loyalty that exists between a provider and a consumer. The provider can be a company, employer or any other entity. The provider is the entity that is asking the questions on the NPS survey. The consumer is the customer, employee, or respondent to an NPS survey.

 

How It Works

The Net Promoter Score, itself, is calculated based on responses to a single question: How likely is it that you would recommend our company/product/service to a friend or colleague? The scoring for this answer is most often based on a 0 to 10 scale.
Those who respond with a score of 9 or 10 are called Promoters, and are considered likely to exhibit value-creating behaviors, such as buying more, remaining customers for longer, and making more positive referrals to other potential customers. Those who respond with a score of 0 to 6 are labeled Detractors, and they are believed to be less likely to exhibit the value-creating behaviors. Responses of 7 and 8 are labeled Passives, and their behavior falls in the middle of Promoters and Detractors.
The Net Promoter Score is calculated by subtracting the percentage of customers who are Detractors from the percentage of customers who are Promoters. For purposes of calculating a Net Promoter Score, Passives count towards the total number of respondents, but do not directly affect the overall net score.

Companies are encouraged to follow the likelihood to recommend question with an open-ended request for elaboration, soliciting the reasons for a customer’s rating of that company or product. These reasons can then be provided to front-line employees and management teams for follow-up action. Local office branch managers at Charles Schwab Corporation, for example, call back customers to engage them in a discussion about the feedback they provided through the NPS survey process, solve problems, and learn more so they can coach account representatives.

 

Additional questions can be included to assist with understanding the perception of various products, services, and lines of business. These additional questions help a company rate the relative importance of these other parts of the business in the overall score. This is especially helpful in targeting resources to address issues that most impact the NPS. Companies using the Net Promoter System often rely on software as a service vendors that offer a full suite of metrics, reporting, and analytics.

The primary purpose of the Net Promoter Score methodology is to evaluate customer loyalty to a brand or company.The ability to measure customer loyalty is a more effective methodology to determine the likelihood that the customer will buy again, talk up the company and resist market pressure to defect to a competitor. Measuring loyalty can be done in several ways, and researchers have asserted that there are better predictors of actual recommendations than asking “likelihood to recommend.” Since the purpose of Net Promoter is not to predict actual recommendations alone, but to predict the full suite of financially-advantageous behaviors, proponents of the methodology do not find this troublesome.

 

Net Promoter System also requires a process to close the loop. Closing the loop is a process by which the provider actively intervenes to learn more from customers who have provided feedback, and also to change a negative perception, often converting a Detractor into a Promoter. In order to do this, the survey respondent can not be anonymous (something that can have a negative impact in the willingness to take the survey or to give low grades). The Net Promoter survey will identify customers who need some follow-up, including Detractors, and should automatically alert the provider to contact the consumer and manage the followup and actions from that point.

Proponents of the Net Promoter approach claim the score can be used to motivate an organization to become more focused on improving products and services for consumers. They further claim that a company’s Net Promoter Score correlates with revenue growth. The Net Promoter approach has been adopted by several companies, including Siemens, E.ON, Philips, GE, Apple Retail, American Express, and Intuit. It has also emerged as a way to measure loyalty for online applications, as well as social game products.

A customer is able to leave comments in the surveys sent to them. This is what allows a company to use the VOC (Voice of Customer) to ensure that company is meeting the expectations.

Some proponents of the Net Promoter Score also suggest that the same methodology can be used to measure, evaluate and manage employee loyalty. They claim that collecting the feedback from employees in a manner similar to Net Promoter customer feedback can provide companies a way to maintain focus on their culture. What is sometimes called the “employee Net Promoter Score” or eNPS has been compared to other employee satisfaction metrics and some companies have claimed that it correlates well with those other metrics.

In the face of criticisms of the Net Promoter Score, the proponents of the Net Promoter approach claim that the statistical analyses presented prove only that the “recommend” question is similar in predictive power to other metrics, but fail to address the practical benefits of the approach, which are at the heart of the argument Reichheld put forth. Proponents of the approach also counter that analyses based on third-party data are inferior to analyses conducted by companies on their own customer sets, and that the practical benefits of the approach (short survey, simple concept to communicate, ability to follow up with customers) outweigh any statistical inferiority of the approach. Interestingly, they also allow that a survey using any other question can be used within the Net Promoter System, as long as it meets the criteria of sorting customers reliably into promoters, passives and detractors.

 

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