The VIP celebrity superstar of smart customer experience is undoubtedly the Net Promoter Score (NPS) index. Designed to measure customer loyalty, it is based on one single question: “How likely are you to recommend our business to your friends?” At Howazit, we know this one question is so crucial that we encourage our clients to incorporate the NPS in their satisfaction survey.
Understanding the Origins and Usage of the Net Promoter Score (NPS)
NPS stands for Net Promoter Score. It is a metric used in customer service to measure the loyalty of a customer to a company. NPS is calculated by asking customers how likely they are to recommend the company to others on a scale of 0 to 10. The score is then calculated by subtracting the percentage of detractors (those who score 0-6) from the percentage of promoters (those who score 9-10).
Fred Reichheld, a partner at management consultancy firm Bain & Company, invented the Net Promoter Score (NPS) system as a straightforward way of measuring customer loyalty. He found that most surveys were too complex and didn’t provide clear actions for businesses to take. Therefore, he sought to create a much simpler, more understandable, and actionable system.
NPS was introduced in 2003 in a Harvard Business Review article titled “One Number You Need to Grow.” In the article, Reichheld argued that businesses could evaluate their success by asking customers just one question, “On a scale from 0-10, how likely are you to recommend our company/product/service to your friends and colleagues?”
Since its introduction, NPS has been widely adopted across various industries and is seen as a key metric to gauge customer loyalty and predict business growth.
How is NPS calculated?
The Net Promoter Score (NPS) is calculated using the responses to 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?”
Based on their scores, customers are classified into three categories:
– Promoters (9-10 score): Loyal enthusiasts who will keep buying and refer others.
– Passives (7-8 score): Satisfied but unenthusiastic customers who are vulnerable to competitive offerings.
– Detractors (0-6 score): Unhappy customers who can damage your brand and impede growth through negative word-of-mouth.
NPS is then calculated by subtracting the percentage (%) of Detractors from the percentage (%) of Promoters. The score is not expressed as a percentage but as an absolute number lying between -100 and +100.
For instance, if 10% of respondents are Detractors, 20% are Passives and 70% are Promoters, your NPS score would be 70% (Promoters) – 10% (Detractors) = +60. The Passives count towards the total number of respondents, which decreases the percentage of detractors and promoters and pushes the net score towards 0.
Understanding NPS Benchmarks and Interpreting Good or Bad Scores
NPS benchmarks are standardized measures that allow businesses to compare their Net Promoter Score (NPS) with other companies in the same industry. They provide a context for interpreting NPS scores, as what could be considered a ‘good’ score can vary between industries.
As for what constitutes a ‘good’ or ‘bad’ NPS score, it’s largely relative and dependent on industry standards. However, any positive NPS score (i.e., over zero) could be considered good because it means you have more promoters than detractors.
As a general guide:
– An NPS score above 0 is considered okay, as it means you have more promoters than detractors.
– An NPS score above 20 would be considered favorable.
– An NPS score above 50 is excellent.
– An NPS score above 70 is world-class and achieved by only the top-performing businesses in customer satisfaction.
In contrast, a negative NPS (i.e., below zero) would indicate you have more detractors than promoters, suggesting customer dissatisfaction and room for improvement.
Keep in mind that these are general benchmarks and could vary by industry. The best approach is to compare your NPS with industry-specific benchmarks, strive to improve your score, and correlate it with business growth.
Segmenting your NPS can also provide valuable insights. You may break your score down by customer demographics, transaction types, service lines, or other criteria relevant to your business to check if there are notable differences in satisfaction levels across different groups.
Also, reading the open-ended responses often asked after the NPS question can help you understand the reasons behind the score, providing insights into what your company is doing well and where there are opportunities for improvement.
Remember, NPS is not just about the score. The real value lies in using this feedback to make informed business decisions to improve customer experience and drive growth.
Different uses of NPS
Net Promoter Score (NPS) has multiple uses in a business context. Here are some key applications:
- Measuring Customer Loyalty: At its core, NPS is a tool for measuring customer loyalty. It helps companies understand how many of their customers are promoters (loyal enthusiasts) and how many are detractors (unhappy customers).
- Gathering Customer Feedback: The open-ended question that typically follows the NPS question (“Why did you give that score?”) provides invaluable qualitative feedback from customers.
- Tracking Performance Over Time: Businesses can track their NPS regularly to monitor changes in customer satisfaction and loyalty over time. It can help identify trends, impacts of changes or initiatives, and areas of improvement.
- Benchmarking: NPS can be used to benchmark against industry averages or competitors, giving a relative understanding of a company’s customer loyalty compared to others in the market.
- Identifying Areas of Improvement: An analysis of responses, particularly from detractors and passives, can help businesses identify product issues or shortfalls in customer service.
- Guiding Business Strategy: Companies can use NPS data to strategically focus on improving customer experience, product offerings, or other aspects that impact customer loyalty and satisfaction.
- Predicting Business Growth: Highly satisfied customers (promoters) are more likely to stay loyal, make repeat purchases, and refer others. An increase in NPS often correlates to business growth.
- Employee Performance Evaluations: In businesses with a focus on customer service, individual or team NPS scores can be used as a metric in performance evaluations or incentive programs.
Transactional vs Relational NPS programs
Transactional and Relational NPS programs are two different ways of applying the Net Promoter Score system, each serving a distinct purpose:
- Transactional NPS (tNPS): This approach measures customer feedback at specific touchpoints or after specific transactions. For example, after a customer service call, purchase, or installation of a product, customers may be asked to complete a survey that includes the NPS question, “How likely are you to recommend our product/service to a friend or colleague?” The aim of tNPS is to gain feedback on particular interactions or transactions. It’s useful for understanding the quality of different customer touchpoints, identifying points of friction, and pinpointing opportunities for improvement.
- Relational NPS (rNPS): This method measures overall customer loyalty towards a brand or company, not tied to a specific transaction or interaction. Customers might be surveyed annually, bi-annually, or quarterly and asked the standard NPS question. rNPS provides an overview of a customer’s broader relationship and experience with the company. By tracking rNPS over time, companies can gain insights into longer-term trends in customer loyalty and satisfaction.
Both tNPS and rNPS provide valuable insights, and many companies may choose to use a combination of both, depending on their business type and objectives.
The importance of measuring NPS
Measuring Net Promoter Score (NPS) is important for several reasons:
- Customer Loyalty: NPS is a widely recognized measure of customer loyalty and satisfaction. It goes beyond just measuring customer happiness; it gauges their willingness to recommend a company’s product or service to others. High scores generally suggest strong customer loyalty.
- Customer Feedback: The NPS survey often includes an option for customers to provide open-ended feedback. This qualitative data is valuable for understanding customer experiences, issues, and potential areas for improvement.
- Business Growth: There is a strong correlation between a high NPS score and business growth. Satisfied customers, or promoters, are likely to refer others to the business. Acquiring customers through referrals is usually cheaper and more effective than other acquisition methods.
- Competitor Benchmark: It can be used as a benchmark against competitors. By comparing your NPS score with the scores within your industry, you can gauge where your business stands in terms of customer loyalty.
- Predicting Customer Behavior: NPS can help predict customer behavior, like their potential future purchases or likelihood of churn. This can help businesses to proactively manage their customer base and take action to improve customer loyalty.
- Easy to Understand and Use: It’s a simple, straightforward metric that can easily be tracked over time and provides a measure that everyone in the organization can understand and work toward improving. This allows teams or businesses to align their efforts on improving the customer experience.
Here are our top 5 reasons why we recommend customers incorporate an NPS question:
- Measuring satisfaction as a business research tool – Measurement is just the first step in identifying the strengths and weaknesses of a business in customer experience. Only through data analysis of those measurements can a business identify key points for retention and improve accordingly.
- Measuring satisfaction as a business management tool – Measurement allows managers to know what is really happening in the business and what the true strengths and weaknesses are so they can manage accordingly.
- Laying the groundwork for a review – Just asking the question, ‘Would you recommend us?’ plants a seed in the customer’s mind, prompting them to think about giving a review. When they realize, “Hell yeah, I’d recommend them,” the next logical step is to actually write that recommendation. At Howazit we also directly channel customers to actual review sites like Google and YELP, or to WhatsApp members.
- Calculating and understanding through an easy numerical index – Again, the score is calculated by just subtracting the percentage of Detractors from the percentage of Promoters. Scores range from 100 to -100, with the 50 range being excellent. Can understanding the reality on the ground get any simpler than that?
- Measuring against the global comparative index – As of 2020, according to Wikipedia, two-thirds of Fortune 1000 companies use the NPS index. This commonality means a business can evaluate itself compared to objective benchmarks in its field anywhere around the world and truly understand its customer loyalty relative to competitors.
Steps to Creating an Effective Net Promoter Score (NPS) Survey
Creating an NPS (Net Promoter Score) survey is a straightforward process. Here’s a step-by-step guide:
- Define the Purpose: Identify what you want to measure. Is it a transactional interaction (like a specific purchase or support call) or overall customer loyalty towards your brand?
- Choose a Survey Platform: Select a platform to send out your survey. It could be a specialized tool like SurveyMonkey, Typeform, or an NPS-specific tool, or it could be an option integrated into your CRM or other customer communication software.
- Craft the NPS Question: The standard NPS question is “On a scale of 0-10, how likely are you to recommend our company/product/service to a friend or colleague?” Keep the question as is to ensure consistency with standard NPS methodology.
- Include Follow-up Questions: Beyond the primary NPS question, it’s essential to ask follow-up questions for more detail. A popular one is “What is the primary reason for your score?”
- Keep It Simple: A good rule of thumb for NPS surveys is to keep them short and simple to maximize response rates.
- Send Invitations: Determine how you will send the survey (email, in-app prompt, SMS, etc.). Craft a clear, inviting message explaining why their feedback matters.
- Choose the Right Timing: Timing is crucial to get maximum responses. For transactional NPS, it’s best to send the survey immediately or shortly after the interaction. For relational NPS, it’s typically on a regular cadence, like quarterly or annually.
- Analyze Results: Once responses start flowing in, analyze both the quantitative scores and the qualitative feedback. Understand the reasons behind the scores and take action based on the feedback.
- Close the Loop: Follow up with respondents, especially detractors and passives. Address their concerns, and let them know their feedback is valued and actions are being taken.
- Continuously Improve: NPS is not a one-time measure. Regularly gauge your customer experiences, understand their evolving needs, and make necessary improvements to enhance their satisfaction and loyalty.
In conclusion, the Net Promoter Score (NPS) is a remarkably useful tool for gauging customer loyalty and satisfaction. It is simple yet impactful, providing companies with clear insight into their performance from a customer’s perspective. By systematically tracking NPS, businesses can have a pulse on their customers’ experiences and feelings toward their product or service. They can identify areas of weakness, spotlight opportunities for improvement, and monitor changes over time. However, NPS isn’t just about the score. Behind this metric lies the real opportunity—using the data to actionably improve customer experiences. Regularly measuring, analyzing, and acting upon your NPS can result in enriched customer relationships, enhanced brand image, and ultimately, business growth. Remember, the true power of NPS is harnessed when it is deeply embedded within your customer-centric approach, consistently pushing you to do better for your customers, your most essential promoters.
When it comes down to is that you can’t fix what you don’t know. Only when you measure, can you then quantify, compare, and substantially improve. J