• author: The Finance Storyteller

Understanding Net Promoter Score: The One Number You Need to Grow

Net Promoter Score (NPS) is a straightforward method of measuring and managing customer loyalty, popularized by the article "The One Number You Need to Grow" by Fred Reichheld in the Harvard Business Review in December 2003. While traditional customer surveys tend to be lengthy and unengaging, NPS asks only a single survey question that evaluates customers' likelihood to recommend a company to others. This approach has revolutionized the way businesses of all sizes measure customer loyalty.

In this article, we will take a closer look at what NPS is, how it works, and how you can use it as a meaningful key performance indicator for your business.

What Makes NPS So Popular?

NPS promises to be faster, real-time, simpler, and more cost-effective than traditional customer surveys. Indeed, it is so popular that versions of the Net Promoter Score are now used by two-thirds of Fortune 1000 companies.

One reason behind its success is the simplicity of the survey question. Respondents are asked, "How likely is it that you would recommend [company X] to a friend or colleague?" They rate their replies on a scale from zero to ten. Ratings are grouped into three categories: detractors (0-6), passives (7-8), and promoters (9-10). Only promoters, the most enthusiastic customers, can create growth by word-of-mouth for a company.

Another reason for the popularity of NPS is that it can be a principled element of a company's roadmap to grow trends. CEOs under pressure to grow their company faster are attracted to NPS as an operating management tool.

Calculating NPS

To calculate NPS, the percentage of promoters is subtracted from the percentage of detractors. The resulting score falls between -100 (meaning everyone hates us) and +100 (meaning everyone loves us).

Let's go through the NPS calculation steps below:

  1. You have 400 respondents rate your company from 0 to 10.
  2. Ratings are grouped into detractors, passives, and promoters categories.
  3. Detractors are those who scored 0 through 6, passives are those who scored 7 or 8, and promoters are those who scored 9 or 10.
  4. Out of the 400 respondents, 188 are detractors, 96 are passives, and 116 are promoters.
  5. These absolute numbers are then converted into relative numbers. The percentage of detractors is ‍47%, the percentage of passives is 24%, the percentage of promoters is 29%.
  6. The NPS is then calculated by taking the percentage of promoters minus the percentage of detractors. In this example, 29% minus 47% yields an NPS of -18.

Interpreting NPS

An NPS of +100 means that 100% of survey respondents are promoters, and an NPS of -100 means that 0% of the survey respondents are promoters. According to the study by Bain & Company, the global management consultancy and source of the NPS system, anything above 50 is excellent, and above 80 is world-class.

A high Net Promoter Score indicates high customer loyalty, which in turn affects growth and profitability. An NPS score of -18 clearly implies that there is room for improvement.

Improving Your NPS

To improve your NPS, it is important to go back to the survey data. Identify the reasons for low scores and come up with improvement plans to increase customer loyalty. To enhance customers' experience, you may ask for their feedback, and identify the root causes of their dissatisfaction.

After several improvements, conduct another NPS survey to determine the effectiveness of your efforts. If there are more promoters than detractors, then the company is on the right track.

The Pros and Cons of Net Promoter Score

Net Promoter Score (NPS) has become increasingly popular in the business world and beyond, as a tool to measure customer loyalty. However, there are both advantages and disadvantages to using NPS in your company. Let's take a closer look at them:

Pros of NPS

  • NPS is easy to use and understand.
  • It provides a simple and clear metric that can be used to compare the loyalty of companies within the same industry, or across different industries.
  • It helps to identify promoters, passives, and detractors, which in turn can guide your company's marketing and customer support strategies.
  • It can help to monitor the effectiveness of efforts made to improve customer experience over time.
  • It can be a reliable indicator of a company's potential for growth, if used correctly.

Cons of NPS

  • NPS can be a blunt tool, as it only measures the likelihood of customers to recommend a company to others, without taking into account their reasons for doing so or their other experiences with the company.
  • NPS calculations can be impacted by cultural factors, with different regions or countries tending to rate providers with varying degrees of enthusiasm.
  • NPS is vulnerable to manipulation, with some companies "gaming" the system in order to boost their scores artificially.
  • If not used appropriately, NPS can create a culture of fear around achieving high scores, which is counterproductive to building a motivated and engaged workforce.

Tips for Using NPS Effectively

  • Use NPS in combination with other metrics to gain a more complete understanding of customer loyalty and satisfaction.
  • Be aware of the potential for cultural bias in your NPS results, and take this into account when interpreting them.
  • Avoid using manipulative tactics to influence survey responses, and focus on using NPS as a way to measure true underlying customer loyalty.
  • If you do decide to use NPS in your company, use it as a tool for continuous improvement, rather than tying compensation or promotions to achieving high scores.

By understanding the pros and cons of Net Promoter Score, and using it appropriately in your company, you can leverage the benefits of this popular tool to improve customer experience and drive growth.

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