The One Metric To Rule Them All — Net Promoter Score (NPS)
There is no magic-bullet metric that works for all the needs of an organization. But there is one that comes close — Net Promoter Score (NPS). Metrics and KPIs surround us in all realms of business. They exist for departments, products, services and even human resources. It could get quite tricky trying to decide on the right metrics that an organization should track to ensure success. What if there were a simple, effective, and statistically significant metric to ensure revenue growth? This is where NPS comes in to picture.
What is NPS?
In the simplest of terms, NPS is a customer satisfaction and loyalty metric. It is a numerical score expressed as the percentage difference between your promoters and detractors, based on customers’ response to two survey questions. Among all the metrics that are used to benchmark customer satisfaction and loyalty, NPS stands tall as the one metric that strongly correlates with its effectiveness in tracking revenue growth.
“If you build a great experience, customers tell each other about that. Word of mouth is pretty powerful.” — Jeff Bezos
How is it calculated?
The calculation is simple, as given below.
Step 1: Survey the customers on the following two questions:
Question 1 (Quantitative): Answers are based on a 11 point scale from 0 to 10.
How likely are you to recommend us/my brand/product/service to a friend or colleague?
Question 2 (Qualitative): Seeking descriptive answers from all those who have answered the first question.
Why did you give us that score?
Here is what it would look like:
Step 2: Categorize the customers as follows, based on the scores that they have submitted
Promoters: Scores 9 & 10
Passives: Scores 7 & 8
Detractors: Scores 0–6
Step 3: Subtract the percentage of detractors from the percentage of promoters. The result is your NPS.
[NPS = % of Promoter — % of Detractors]
Where does it come from?
From Frederick F. Reichheld, Director Emeritus at Bain and Company in 2003. His work on revenue oriented customer loyalty assessments covers over 4000 customers and six industries for over two years. The research culminated in NPS as ‘The One Number You Need to Grow’.
“The only path to profitable growth may lie in a company’s ability to get its loyal customers to become, in effect, its marketing department.” — Frederick F. Reichheld
Does it work?
The numbers say so. Research of 400 companies from over a dozen sectors has proved that NPS is the single metric that correlates positively with revenue growth over a three-year period. Take a look…
Why does it work?
In simple terms, the strongest measure of customer loyalty is when a customer will put his own reputation at risk to recommend the company or its services. Besides that, focus on the most enthusiastic customers and what they like in your product or service will help the organization focus and improve upon the products or services that make the difference.
Net Promoter Score works because it is simple. It requires minimal resources, its turnaround time is quick, it doesn’t cause customer fatigue, and it is easy to understand for everyone across all levels of the organization.
What are the types?
Broadly, there are two types of NPS scores — Relational and Transactional.
NPS-r (Net Promoter Score — Relational) is the net promoter score for the brand, company or product in general. Not specific to a particular feature, service or goods sold. The NPS-r survey is usually conducted at regular intervals. For example, NPS for Amazon as a company, rather than an item purchased through the Amazon retail platform.
NPS-t (Net Promoter Score — Transactional) is the net promoter score associated with a specific customer touch point — such as the purchase of goods or services.
There are some more types of NPS worth mentioning;
Absolute NPS Vs Relative NPS: Absolute NPS is the absolute score, regardless of industry or competitors. Relative NPS is the NPS of your company as compared to the NPS of your competitor. This comes handy if you are up against a few competitors in a market segment.
Customer NPS Vs Buyer NPS: Often in B2B or B2B2C businesses, the buyer and the user are not the same. For example, enterprise softwares. The buyer NPS tends to be higher than the user NPS. The buyer NPS will depend on the onboarding time, while the user NPS will depend on the learning curve.
What is a good NPS?
It depends on your industry. Here are some examples of NPS across different industries.
Creators of NPS, Bain & Company, suggest an absolute NPS score:
Above 0 is good,
Above 20 is favorable,
Above 50 is excellent, and
Above 80 is world class.
We should compare apples to apples. The right approach will be to find out the NPS of the top firms in your industry and use it as a benchmark. It is near impossible to get a 100 NPS. But there are companies such as Amazon, Netflix, Starbucks, and Tesla, which have NPS of 75 to 100. Once your NPS is over 80 or above, you can consider yourself as world class.
Ideally, it should be above your competition and if you seek to be world class, aim for an NPS above 80. Are you a startup looking to get to product-market fit? Aim for an NPS of 50.
How often should I measure it?
It is quite common to measure NPS-r quarterly. This gives enough data for the product team to gain insights, while not causing customer fatigue. If in doubt, measure it quarterly.
NPS-t can be measured along with major transactions, such as major software releases, major instances of delivery of products or services, etc. Be mindful of inducing customer fatigue, if over-used.
What to do with my NPS score?
The aim here is quite simple — to keep improving the NPS. The least acceptable goal should be that your NPS is on par with the industry standard.
Benchmark your NPS and monitor the change periodically against the industry NPS, your own prior NPS, and against your competitors’ NPS.
Promoters: Reach out to them and ask for testimonials and referrals. Leverage them as the external marketing department of your company. Get a clear understanding of what you are doing right and why the customers like your product or service.
Passives: Passives are one step away from being promoters. Reach out to them and find out what it takes to convert them to promoters. This part usually is the low-hanging fruit.
Detractors: Reach out to detractors and speak with them. I mean, really — speak with them. Avoid auto generated emails or survey forms. Put on your listening hat and spend time with them. Done right, this has the potential to be the gold mine of lessons that could take the company to a path of building customer centric products and revenue growth.
What are the downsides?
Some may feel that it is too simple for a comprehensive feedback on their product or service. There is some truth to it. After all, one aim of NPS is to keep it simple!
As with any other metric, NPS can be gamed too. For example, if you ask only your happy customers to leave a review, or if you pay your customers for an excellent review, your NPS would be artificially high.
“You have to start with the customer experience and work backwards towards technology. Not the other way around” — Steve Jobs
NPS can become the goal, instead of using NPS to move towards the goal. Remember that a great NPS is a byproduct of a superior customer experience. Do not cut corners and tweak products without looking at the bigger picture.
What else is out there?
Here are a bunch of other metrics that are used in the assessment of customer satisfaction and loyalty. They are all useful in their own ways. We just have to make sure that they are used appropriately within the right context.
“Only three things matter in business — 1. Customer Satisfaction, 2. Employee Satisfaction and 3. Cashflow. Take care of 1 and 2, and 3 will happen “— Jack Welch
Customer Satisfaction Score (CSAT): CSAT is based on the customers’ response to just one survey question — How satisfied were you with our product/service? Customers rank their satisfaction on a five point scale.
CSAT = (Total number of 4 and 5 responses) ÷ (Total number of responses) x 100
CSAT is more of a touchpoint metric like NPS-t. It is not that useful to assess customer loyalty towards the brand or company.
Customer Effort Score (CES): CES is based on the customers’ response to a singular survey question — How much effort did it take to deal with us? Customers rank the degree of effort on a five point scale.
CES = (Total number of 4 and 5 responses) ÷ (Total number of responses) x 100
It is common to see additional qualitative questions along with CES and CSAT.
Product Engagement Score (PES): With PES, we assume that higher customer engagement corresponds with higher customer satisfaction. The advantage of PES is that we don’t have to send out surveys. We can measure it through product analytics.
PES = ((Adoption + Retention + Stickiness) ÷ 3 ) x 100
Stickiness = DAU/MAU
Customer Churn: Churn is the percentage of customers who have stopped using the product or service in a given time period. Customer Churn Rate inversely correlates with Customer Retention Rate.
Customer Churn Rate = (Lost Customers ÷ Total Customers at the Start of Time Period) x 100
Customer Health Score (CHS): This score is subjective and custom made for each type of business. It involves defining what variables correlates with a healthy customer and what variables correlates with an unhealthy customer. Once that is done, the next step is to categorize customers into healthy and unhealthy buckets based on pe-determined variables as mentioned above. The goal is to convert as many unhealthy customers in to healthy customers.
Conclusion
NPS is a reliable and time tested method to measure and benchmark customer satisfaction and loyalty. Simplicity is one of its biggest strengths. The numbers prove its ability to guide the organization towards revenue growth.
A satisfied customer is the best business strategy of all — Michael LeBouef
As with any other metric, NPS has its pros and cons. Regardless of the metrics that you choose to use, the main message here is to just start tracking your customer satisfaction and loyalty.
All said and done, we shouldn’t measure NPS just for benchmarking and tracking. We should be using it to adopt a culture of execution and continuous improvement. NPS will be an invaluable tool in your arsenal in this regard.
