Net Promoter Score

The Net Promoter® Score (NPS®) is a method to measure customer satisfaction and customer loyalty and relate this information to the growth opportunities of a company. The basic assumption is that customers will recommend a company, product or service, if they are satisfied with the product or services they received.  The Net Promoter® Score tries to establish this with a key question. Customers are asked whether they would recommend the company. If they do, it would indicate growing success of the company. A second question is supposed to generate feedback by asking for ways to improve customer service or products and services.

General information

The metrics of the Net Promoter® Score were developed jointly by Fred Reichheld, Bain Company, and Satmetrix and presented in the Harvard Business Review by Fred Reichheld. He discusses how this idea came about and the empirical research that followed, in his article, “The One Number You Need to Grow. In dealing with classical approaches to customer satisfaction measurement, Reichheld concludes that most existing approaches do not adequately describe aspects such as satisfaction and loyalty, and do not relate to the growth of a company. However, it is obvious that genuine loyalty significantly influences the profitability of a company. Satisfied customers are a prerequisite for growth, says Reichheld.[1]

The Net Promoter® Score is a fairly simple tool to quantify customer satisfaction and loyalty. At the same time, the results should be seen in a larger, more complex context. Only through a link with specific recommendations for action can sustainable changes be made in companies. The NPS® is therefore also an instrument which can be helpful in the fields of change management, quality assurance, and customer relationship management. Companies do not just want to know about their customer loyalty, but also how to improve it. Long-term changes can only be achieved if the NPS® is considered an analysis method and a strategic component of company development.[2]

How the Net Promoter® Score works

Customers are presented with two questions as part of an NPS® analysis:

  • How likely is it that you would recommend this company, brand or service to friends, colleagues, and relatives?
  • What is your reason for this response? Or: Do you have any improvement suggestions for us?

The NPS® value is calculated from the answers to the first question on a scale from 1 to 10. The answers to the second question provide information about the motivation of the customer and possible improvements.

The calculation of Net Promoter® scores is based on three presumed consumer categories:

  • Promoters: All test persons, who provided data between 9 and 10, are considered as promoters. That means it is very likely that they are satisfied and would make a recommendation.
  • Passive (Undecided): Anyone who has crossed responses between 7 and 8 is seen as an undecided customer. They have not yet made a decision on a recommendation.
  • Detractors (critics): All responses between 0 and 6 are counted among the critics. It is unlikely that they would make a recommendation.

All answers to the first question are evaluated using these three categories, whereby any differences are being neglected.[3] The formula for calculating the NPS® is based on the relative proportions of two groups with respect to the basic group:

 Number of promoters (or critics) / number of respondents * 100

As the next step, the relative proportions of advocates are deducted from those of the critics.

 Relative number of promoters – Relative number of critics = NPS

The result is a percentage between 100% and -100%. Negative values ​​represent a large proportion of critics, while positive values ​​indicate the proportion of promoters. The higher the positive values, the better the Net Promoter® Score and thus the growth opportunities.

The feedback from the second question is intended to be used to communicate suggestions, criticism, and improvements to all internal departments. This is also referred to as the voice of customer (VOC) and allows the customer to be involved in the design of the products and services (see: Customer Empowerment). It is also recommendable to check with the customers who took part in the survey again. Reichheld calls this concept “close the loop” or “closing the customer feedback loop.” That way, companies can learn more about their customers and critics may be transformed into promoters.[4]

Advantages / Disadvantages of the NPS®

The forms of the survey may vary between online questionnaires, email feedback, or surveys integrated into websites. The simple implementation of the metric is a major advantage of the NPS®. Its informative value depends on how many customers are participating. The results can only be regarded as representative of a certain number of participants.

Although Reichheld was able to establish a connection between the NPS® and the growth of companies, this relationship is by no means causal, but correlative. The reasons for high or low growth rates can be somewhere else. The Net Promoter® Score should therefore only be seen as an early indicator of growth and not as an actual description of the economic potential, which is mostly described by actual sales and conversions.

Satisfaction and loyalty can be measured with the NPS®, and companies can learn something about their customers. But the NPS® is only suitable to a limited extent as a complete description of customer loyalty because it ignores other aspects of scientific customer loyalty studies. Examples would be a driver analysis to find out why customers recommend a company or not, as well as a segmentation of regular customers and new customers in order to differentiate between satisfaction and loyalty.

The Net Promoter® Score is criticized by many experts. However, it is generally accepted as a measure of customer loyalty in certain industries and countries. Numerous listed companies provide the NPS® in their company balance sheets. These results are only comparable in the rarest cases, since the survey methods often differ. The same applies to different sectors and countries or cultural backgrounds. The empirical evidence for the NPS® comes from selected countries and sectors and should probably not be generalized.

Relevance to online marketing

In online marketing, the NPS® can be used as a relatively simple and effective feedback tool. The low number of questions leads to high participation rates, since answering does not take a lot of effort. The survey and evaluation can be partly automated if the questions are put online or the system is integrated on a website. Companies get direct customer feedback and possibly also suggestions for improvement. The latter appears particularly important in order to be able to derive practical measures from the surveys and to improve the customer experience at different touchpoints.

This internal learning process is always emphasized by advocates of the NPS®, but it depends on the quality of the data and its correct interpretation. The Net Promoter® Score seems to be particularly useful against the backdrop of digital business models that focus on viral marketing, word of mouth, and influencer marketing. From the point of view of these approaches, the Net Promoter® score indicates high growth potential when a high level of willingness to participate exists. However, the metric does not appear to be sufficient and should be supplemented by systematic aspects and other KPIs. Moreover, Reichheld himself has been working on the Net Promoter System® and this system is focused more on long-term effects and augmenting the metrics.

References

  1. The One Number You Need to Grow hbr.org. Accessed on 04/22/2016
  2. Measuring your Net Promoter® Score ultimatequestion.com. Accessed on 04/22/2016
  3. Net Promoter Score medallia.com. Accessed on 04/22/2016
  4. Closing the Customer Feedback Loop hbr.org. Accessed on 04/22/2016

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