What is a Net Promoter Score (NPS) and why is it important?

Have you ever filled out a survey that asked you to rate the likelihood that you’d recommend a product or brand to someone? Ever wondered what is that small and simple survey for? Well, that survey is a benchmark for businesses to measure customer satisfaction and ascertain loyalty, commonly known as Net Promoter Score (NPS). It is an index between -100 and 100 that measures the likelihood of customers recommending a business’ products/services to others. Positive NPS shows the color green and negative shows red. Why do they always consider Yellow a mediocre color? Anyway!

The general notion is that the customers in green are extremely crucial as they are the most satisfied customers of our business. But is that really so?

I would say the customers in Red are extremely crucial as they are the ones losing interest in your business and might impact the customers in green in the future.

How to calculate the Net Promoter Score?

The customer is asked to rate on a 0-10 scale, the likelihood of her recommending the product/ service or the company/brand to someone. Then their ratings are consolidated to classify these customers as Promoters (rating 9 or 10), Passives (rating 7 or 8), or Detractors (rating 0-6).

As the name suggests, the promoters love the product or services, are going to buy again, and will bring in more potential customers to the company.

The detractors, on the contrary, are the customers who are not likely to purchase again, and can possibly harm the company’s name through bad word of mouth.

Passives lie in between, they are not very enthusiastic about the products or services and can easily switch between competitors. They will obviously not promote the products, but won’t bad mouth them either.

The net promoter score is calculated by deducting the percentage of detractors from the percentage of promoters.

NPS = (# promoters/ # total respondents) – (# detractors/ # total respondents)

Why do we need NPS?

There is a positive correlation between the company’s NPS and its growth. But, NPS has to be made a part of the organization’s ecosystem to bring in any substantial value. Nonetheless, NPS does provide many benefits to a business.

Word-of-mouth quantification

It has been established that more than 92% of customers trust the word of their family and friends more than any other form of advertising. When we know that this form of advertising is so strong, especially in developing markets, quantifying it really helps in efforts towards increasing word-of-mouth marketing.

Benchmarking customer quality

Tracking NPS helps us in quantifying the customer quality we cherish. Apart from the quantitative question to rate their feedback, NPS surveys also have qualitative questions, asking the customer to explain why they chose the rating.

Companies use this response to polish their stakeholder interactions, product improvement, and development, and to demonstrate their commitment to customer success to potential and existing customers.

Are there any limitations of NPS?

While NPS helps businesses in quantifying their customer responses, it fails to provide any substantial insight into customer loyalty or predict the current company performance as a whole.

Moreover, pivoting the decision-making process on a single predictor is much more volatile than relying on multiple indicator models like CFMs (customer feedback metrics). Lastly, without any laid-out plans to act on the NPS, it will serve no use to the company, except for being just another piece of static information.

How to use NPS?

NPS can be used as a company-wide KPI to measure the customer focus and benchmark it against its competitors, by measuring NPS at the organizational level as a top-down approach.

A bottom-up approach can also be used, where NPS is measured at customer touchpoints to influence customer management and design diagnostic tools to analyze customer loyalty.

Various NPS software tools like Survey Monkey, Satmetrix, etc. can be used to collect and analyze data. Customer feedback software tools also come in handy to gather data for NPS quantification.

Market leaders like P&G, Amazon, eBay, Microsoft, SAP, KPMG, Best Buy, etc. are already using NPS to their advantage. When are you?