August 5, 2016
What is NPS
Do you ever get emails like this one? I bet you do. Companies like GE, Apple, and Dell use these emails to measure customer loyalty by asking one simple question: How likely are you to recommend [company] to a friend? This is known as the Net Promoter Score® (NPS) question. It helps you discover the customers who love you…as well as those who don’t. Here’s how it works: Customers rate how likely they are to recommend you on a scale from 0 (extremely unlikely) to 10 (extremely likely). Once you have this data, you can segment your customers into three categories: promoters, passives, and detractors.
The relative value of promoters, passives, and detractors
Here’s a breakdown of the three types of customers you can identify using the NPS method: **1. “Promoters” are customers who respond with a 9 or 10. **They are your ideal customers. Here’s why:
- Promoters consolidate their purchases with you because they love your brand. They’re also more likely to adopt new products and services, and tend to buy premium products and services more often. For these reasons, their accounts grow faster.
- They contribute more revenue, but they also cost less to serve, which results in higher profits. For example, in one case study from the insurance industry, promoters delivered just 1.2% more revenue, but cost 10.3% less to service. They’re also less sensitive to price changes, because they recognize the value of your brand.
- They are your brand evangelists. They actively endorse your brand in person and online. In fact, by some estimates, they account for 80% of your referrals. Because endorsements have a longer life and are easily accessed in the digital age, such referrals have never been more important.
2. “Passives” are customers who respond with a 7 or 8. They are indifferent towards your company and its solutions:
- Passives are moderately satisfied—enough to remain your customers. But they’re also open to offers from your competitors.
- They don’t usually talk bad about your brand, but they certainly wouldn’t refer you to a friend.
- They cost less to serve than promoters or detractors, interestingly enough. But they also deliver less revenue, resulting in minimal profits.
3. “Detractors” are customers who respond with a 0-6. They are your most unhappy customers—the ones you have short, unprofitable relationships with. Unfortunately, many detractors have had a negative experience with your brand. This experience sparks many ongoing issues:
- Detractors respond negatively to price increases because they’re dissatisfied, and are 2.3x more likely to defect.
- They refrain from purchasing additional products and services due to their prior negative experience. They also complain more frequently, which increases your service costs.
- They can cause long-term damage to your brand, if ignored, because they’re responsible for 80% of your negative word-of-mouth.
The evolution of the Net Promoter Score method
The NPS method isn’t just a tool for segmenting your customers. As the name suggests, it’s also a method for evaluating your company’s success. When Fred Reichheld introduced the Net Promoter Score® (NPS) method in 2003, he claimed that a brand’s score could predict repeat purchases as well as referrals. Bain & Company soon confirmed his claim, suggesting that a 12-point NPS increase would double a company’s growth rate. Based on this research, the NPS became known as the leading indicator of a company’s growth. But because Reichheld’s findings have been difficult to replicate, these claims have since come into question. In his defense, Reichheld admits that, while 65% of the top 200 companies globally use the Net Promoter method, few know how to use it properly. Nonetheless, scholars argue that, because Reichheld collected information about repeat purchases and referrals (as opposed to transactional data), his original research was inaccurate. After more than a decade of research, one important distinction has transformed our understanding of the NPS method. It turns out that a 1-point increase at the company level has a significantly larger impact on customer retention than a 1-point increase at the customer level. In other words, customer satisfaction isn’t enough. No matter how helpful your products and services are, customers may defect if a better alternative exists. To boost your customer retention, you must outperform your competitors. For this reason, the NPS is now considered to be primarily a brand measure.
Using your Net Promoter Score to measure your success
Once you’ve collected survey data from your customers, your NPS is easy to calculate: All you have to do is subtract the percentage of your detractors from the percentage of your promoters. Once you’ve determined your score, you can begin tracking it on a regular basis. Tracking your NPS score has two benefits: 1. It can help you benchmark your success. By comparing your score with your competitors’, you can determine where you stand in the industry. This knowledge will help you understand how much you must improve your offerings and/or your customer experience to grow your business. **2. It can help you track your improvements. **By tracking your score on an ongoing basis, you can evaluate the effectiveness of your efforts and feel confident that you’re moving in the right direction. Ask yourself: What’s working? What’s not? Do some efforts have a greater impact on your score than others?
It’s not just a metric. It’s an imperative for action.
In a Harvard Business Review article, Philips’ Former Vice President of Customer Experience Suhail Khan shares an insightful story. After adopting the NPS method in 2006, he discovered a problem:
“A customer, accompanied by his family, goes to an electronics store on a Saturday to buy a home theater system. His whole family is excited. The kids are looking forward to playing their video games, his wife waits to watch her favorite show, and he can’t wait to play his favorite music. They come home, unpack the system (so far so good), and plug it in. And then… nothing! No picture, no sound. He calls the customer support number (which in the Netherlands is in most cases is a 900 number, making the customer pay for the call) and works his way through the initial menu options to eventually discover that support is only available during the week. At that moment, he begins to question his whole decision for purchasing that brand. His family is disappointed, and the weekend potentially ruined.”
After this issue surfaced, Khan acted quickly to resolve it—extending customer care hours to include weekends. The result? A huge surge in customer satisfaction. The thing is, stepping on a scale doesn’t make you lose weight. You’ve got to change your lifestyle. You won’t improve your customer retention rate by simply measuring your NPS. If you want to see change, you have to find the cause of your detractors’ dissatisfaction and fix it. Or figure out how to make passive customers just as happy as your promoters. Ideally, you’ll do both. Do you know your Net Promoter Score®? How do you leverage the NPS method to grow your business? Share your experiences in the comments.