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What is Net Promoter Score (NPS)
Net Promoter Score (NPS) is just a kid on the block compared to most other popular business concepts. It’s difficult to fathom that something as commonly used as NPS was first introduced as late as 2003!
Fred Reichheld, author and business strategist, is credited as the creator of NPS. If you come across a best-selling book with the word “loyalty” in its title, it was probably by Reichheld.
Reichheld’s focus area throughout his career has been customer loyalty. The Economist called him “the high priest of the loyalty cult.”
The goal of the Net Promoter Score (NPS) survey is to understand the degree of customer loyalty by asking just 1 question:
On a scale of 1 to 10, how likely are you to recommend a business to a friend or colleague?
On the NPS scale, one stands for not at all likely, while ten stands for highly likely. The philosophy is simple: Loyal customers will not just express happiness about a product or service; they are likely to recommend the same. NPS scoring thus helps businesses understand where they stand with respect to customer loyalty.
Why is NPS Important
For a business to grow, it needs to retain existing customers and acquire new ones. Existing customer loyalty is critical. It helps maintain a revenue base and is a vital channel for new customer acquisition.
Overall, the benefits of NPS are as follows:
Measures Customer Loyalty
Net Promoter Score is a precise measure of customer loyalty. A customer who responds 9 and 10 to an NPS survey is called a promoter. Scores 7 and 8 are considered neutral or passive. A customer who responds to anything less than 7 is a detractor. 7 and 8 are considered neutral or passive.
A promoter is happy with a business. They might introduce the company to new clients. A detractor is expected to churn off as unhappy with the business. Neutral or passive customers need more to recommend the company.
The aggregate of NPS scores is thus a robust measure of customer loyalty.
Helps in Referral Marketing
NPS surveys are a great way to remind customers to refer your business. NPS tool allows businesses to gather customer feedback and determine how likely they are to recommend the business to others. You can also combine the survey with a call to action, such as
- Leaving a review on a public platform
- Request for the contact details of a friend who might be interested in your product/service
Reduces Customer Churn
If you can measure, you can improve. A company that actively measures NPS is likely to identify customers who are detractors. They can then take the initiative to turn around the detractors. A successful turnaround will help prevent customer attrition and lower the churn of the business.
Improves Growth
You will rarely come across a growing business with happy customers. NPS survey is an excellent pulse check to understand your customer’s level of satisfaction or dissatisfaction. Gathering customer feedback through NPS is essential for businesses as it helps them understand their customers and improve their experience. Then the task is to keep the promoters happy while turning around the detractors. When done correctly, it leads to business growth.
NPS Calculation Formula
NPS calculation is based on a single question: “On a scale of 0 to 10, how likely are you to recommend our company/product/service to a friend or colleague?” Customers who respond with a 9 or 10 are considered “promoters” and are considered loyal to the company. Customers who respond with a 7 or 8 are considered “passives,” while those who respond with a 0 to 6 are considered “detractors.”
The Net Promoter Score (NPS) is calculated using the following formula:
NPS = (% Promoters) – (% Detractors)
The calculation of NPS is a three-step process:
- To calculate the percentage of promoters, divide the number of promoters by the total number of respondents and multiply by 100. For example, if a company receives responses from 100 customers and 60 of them are promoters, the percentage of promoters would be calculated as follows:
Percentage of promoters = (60 / 100) * 100 = 60%
2. To calculate the percentage of detractors, divide the number of detractors (customers who responded with a 0 to 6) by the total number of respondents and multiply by 100. For example, if a company receives responses from 100 customers and 20 of them are detractors, the percentage of detractors would be calculated as follows:
Percentage of detractors = (20 / 100) * 100 = 20%
3. To calculate the Net Promoter Score (NPS), you must subtract the percentage of detractors from the percentage of promoters. This will give you a measure of how likely your customers are to recommend your product or service to others. It is a widely used metric in customer satisfaction and loyalty research. Using the example above, the NPS would be calculated as follows:
NPS = (% Promoters) – (% Detractors)
NPS = (60 / 100) – (20 / 100)
NPS = 60 – 20
NPS = 40
In this case, the company’s NPS would be 40. A high NPS indicates a high level of customer loyalty, while a low NPS indicates a need for improvement. Some companies use NPS as a key performance indicator (KPI) to track changes in customer loyalty over time and identify areas for improvement.
How to Interpret NPS Survey
Interpretation of the NPS score depends on many factors. Do note that companies administer NPS Survey to more than just end customers. Very often, individual departments, too, administer surveys to internal customers. For example, the company’s HR department may send out an NPS survey to employees to understand the level of satisfaction or dissatisfaction with the department.
The following factors need to be considered while interpreting NPS:
- Impact of Recent Events: After a layoff, the NPS of an HR department may come down. While the HR department is not choosing the employees to let go – their presence in the process may trigger an adverse reaction.
- Not all problems can be solved: A customer may expect a price much lower than a company can offer. In that case, the customer is likely to become a detractor. However, it is not a problem that the company can solve.
It is thus advisable to ask the detractors their exact reason for dissatisfaction. The reasons can then be classified and followed up with action.
If you build your NPS survey with Softbrik, you can request customers to provide details using voice (and avoid the hassle of typing). Softbrik’s platform transcribes the audio and also classifies the data for you.
Methods for Estimating Customer Satisfaction using NPS
Various companies use NPS to gauge customer satisfaction differently. Like any other metric, even NPS needs to be looked at with proper context to derive maximum meaning. In fact, critics of NPS complain that the score falls short for the following reasons:
- It doesn’t deliver any direct customer insight
- Scale is arbitrary
- It doesn’t account for cultural differences or industry standards
If you want to gauge customer satisfaction using NPS, you have to address these concerns.
Absolute Method
In the absolute method, the NPS received from a survey is analyzed in isolation. When using the absolute method to understand customer satisfaction, one needs to be mindful of the following:
- The Scale ranges from -100 (all detractors) to +100 (all promoters)
- A low positive or low negative NPS value should be further analyzed. In quite a few cases, most responses may turn out to be Passive/Neutral. The promoters and detractors, in that case, are both outliers.
- If the NPS is low positive or low negative and the passives are low too – it could imply a divided audience. We should investigate further.
- If the NPS is very high positive, there is a chance that the survey was rigged
Relative Method
In the relative method, the NPS is not analyzed in isolation. Instead, it is benchmarked against other factors, which could be :
- Time: Is the NPS improving or worsening over time?
- Industry/Team: Is the NPS better or worse than the industry average?
Frequently Asked Questions
Net Promoter Score Benefits: Why Calculate NPS?
Measuring your Net Promoter Score (NPS) has many benefits, providing a quantifiable way to measure customer loyalty and satisfaction. In addition, calculating the NPS provides an easy and cost-effective way for companies to benchmark their performance across industries. It is a great tool for understanding what drives customer experience and how improvements can be made.
What is a good NPS score?
Ideally, a positive NPS score means that one has more promoters than detractors. However, to understand whether a score is good, we need to validate it with industry benchmarks and look at historical scores.
How do I analyze NPS survey data?
The NPS or Net Promoter Score is calculated by subtracting the percentage of detractors from the percentage of promoters. The score can range from -100 (all detractors) to +100 (all promoters).