The Key Founder Metric: NPS; What it is and why you should track it
There are so many metrics marketers track these days. Whether you’re working in a startup or large company, we’ve never had so many metrics to keep track of that can help us truly understand whether our business is cranking or whether it stinks. But is there a metric that dwarves all others?
Yes there is: Net Promoter Score.
The Metric that Rules them All
Net Promoter Score (NPS) is the willingness of consumers to recommend your product to someone they know. For most businesses, especially startups and small businesses and for the majority of self employed workers who have small or very limited marketing budgets, NPS is crucial. Why? Because word of mouth (WOM) is the primary way these businesses get new customers. Word of mouth fundamentally comes from people’s willingness to recommend your business (NPS). Word of Mouth is the most important marketing channel most of us have. As a matter of fact, in research conducted by Verizon and Small Business Trends in 2014, over 85% of small businesses surveyed cited WOM as the way in which customers discovered their business. If you have low NPS, you don’t get positive WOM. In fact, the reverse usually happens: “Stay away from Bruno’s Beefeaters. You don’t want to know what I think I found in my last hot dog…”
How is NPS calculated and what’s considered good’?
Net Promoter is a simple, one line question that most of us have come across in online surveys, pop-ups or been asked via email. Typically, the question reads: “How willing would you be to recommend our product (service) to a friend?” You then answer on a scale of 0–10 with 10 being the highest possible score and 0 being…well…crap. Here’s what it basically looks like:
The score is calculated by subtracting all the detractors (those who don’t like or might negatively recommend your product) from total promoters (your most vocal advocates). Consumers falling into the category of 7–8 are considered ‘neutral’ for the purposes of the NPS calculation. Initially, this might feel a bit counterintuitive but psychologically if you think about it makes perfect sense. When do you typically recommend something to a friend? When you’re blown away by the quality of the product and it far exceeds what you expected. When do you complain? For many people, they complain at the slightest thing that might annoy them. People are much more likely to complain about a product than praise it. That’s just human nature. (Tweet this). Once you subtract detractors from promoters you typically end up with a score somewhere between -100 to 100. That’s the final NPS.
In terms of scoring, a ‘0’ is neutral but what constitutes a good score? Well, anything that’s positive can be considered ‘good’ but typically anything that’s north of 50+ is considered excellent. Apple, for example, leads the computer industry with an NPS of 72 while in retail, Amazon leads with 69 and Netflix leads its industry average with an NPS of 68 according to Retently.com.
The benefits of a high NPS
Having a sky high NPS has many benefits. The most important benefit is that typically, products with high NPS have higher retention rates than competitors. For example, a subscriber on Netflix stays on the service longer than a subscriber on a rival service. Apple’s retention rate for the iPhone in 2017 was a whopping 92% compared to 77% for Samsung’s Galaxy. Keeping existing customers is the #1 priority for marketers since repeat customers aren’t subject to the usual customer acquisition costs (CAC) and are therefore more profitable for the company.
In addition, a high NPS also means that marketing costs to acquire new users are less for the company in question since a proportion of it’s users are also more likely to recommend that product or service to friends. Just think about it. When was the last time a friend of yours asked for advice about a movie, TV show or restaurant? Did you give them a recommendation? If you did you were a promoter of that product or service. That’s NPS in action for you!
All is not perfect
There have been articles critical of NPS and some have even said that NPS is dead. NPS isn’t perfect and has its weaknesses. For starters, NPS is a question that’s answered by a random sample of your respondents. Like any survey, there is an inherent bias that surveys might be answered by people who like to answer surveys (which may or may not be true). Second, the question is always asked at a specific point in time. For example, Intuit usually asks me about once per quarter how I feel about Quickbooks. If I’m having a really bad day or happen to be struggling with a problem on the platform, I might penalize them more harshly than I ordinarily would. The point is that it’s a snapshot in time so the data is static. One could easily argue that in the fast moving world we have today where certain products, like software, can updated in real time, that NPS data might not be relevant by the time you get it. Mobile games have much faster update cycles than cars, for example. However, that doesn’t totally invalidate the customers experience during that point in time.
Another argument is that simply because a consumer recommends your service, that doesn’t mean they might not churn (leave) if they find a much better deal. We live in a hyper competitive market where products and services are improving more quickly than they did in the past, consumers are better informed and information is more open and available than ever. The point is, you have to keep working to our your customers’ trust every single day. Never let up.
Always practice ‘safe’ research
Anything research based can be tricky so there are best practices when it comes to doing NPS studies or any other question based research for that matter.
First, make sure you use a reliable platform or research vendor. There are plenty on offer out there such as Qualtrics, Retentio.IO, Surveymonkey (where you can run this yourself) or more sophisticated research agencies like YouGov or Nielsen.
Second, make sure you have a representative (large) enough sample size of your user base. If you’re not sure, ask the data scientist or product manager on your team to calculate what a statistically representative sample size would be. When in doubt: size matters in research as in other areas of life ;) (Tweet this)
Third, run it often enough to track the changes you’re making to your product but not so often as to annoy your users. Best practice is usually quarterly though I’ve seen games companies run it as often as monthly when they’re making frequent changes to their mobile apps.
Fourth, never rely just on NPS to assess the health of your business and/or product. You also need to be looking at brand awareness, top of mind, intent to purchase, churn / retention and the retention metrics of your marketing funnel. NPS is the key metric but it has to be taken in the context of other metrics as well. It’s also best practice when you run research to periodically assess how competitors are doing as well. Don’t just look at your own metrics but see how you competition is doing and benchmark yourself against them.
Fifth, I would also urge, if your product allows it, to run NPS questions from directly within your product, if you have a software service for example. For many industries this simply won’t work since they offer a physical good (like a car or a bed), but the closer you can get to when the user is actually using the product, the better.
Lastly, be consistent about how you measure this, structure the question and when you run the survey. The more you change your variables, the harder it is to measure and the less reliable the comparison.
NPS is a vital business metric every business from the smallest startup to the largest, Fortune 500 company, should track. It’s easy to manage, fast to implement and cost effective. Keep in mind the rules above and you should be fine. Just remember never to use it in isolation and always have people on your team willing to challenge your assumptions. Nokia had a great NPS at some point but totally missed the market when the smartphone market moved to touch screens and apps. The rest is history.
In business, only the paranoid survive.