Net Promoter Score (NPS) is a metric for assessing loyalty for a company's brand, products or services. NPS is used as a part of relationship management, and the metric is easy to calculate. In this post, we give you a quick glance at how it works.
Net Promoter Score is based on a single simple question: ‘How likely is it that you would recommend us to a friend or colleague?’
Answers are assigned a score from zero to ten, with ten being the most positive.
Customers are then divided into three categories:
- Promoters (Score: 9-10) are the most loyal
- Passives (Score: 7-8) are satisfied, yet unenthusiastic
- Detractors (Score: 0-6) are unhappy
The Net Promoter Score is calculated by subtracting the percentage of Detractors from the percentage of Promoters.
Reichheld felt that it was important for a company to know how many of its customers were assets and how many were liabilities. By correlating the customer's subjective response to an objective number, the metric can be used to drive a company's internal priorities legitimately.
Reichheld maintains that the Net Promoter Score can be used as a key performance indicator (KPI) for growth because loyalty, in his estimation, is the most important factor for generating sustainable growth. His research found that companies with a better ratio of Promoters to Detractors grew more quickly than their competitors when they maintained an NPS within an overall range of 50-80.
Why NPS is important*
- Promoters account for 80 per cent of referrals in most businesses.
- Detractors account for 80 per cent of negative word-of-mouth.
- Promoters generally defect at lower rates than other customers, which means that they have longer, more profitable relationships with a company.
- On average, an industry’s NPS leader outgrew its competitors by a factor greater than two times.
*Source: Net Promoter System, 2013
Subsequent research from others has challenged that conclusion, and NPS detractors recommend that if an NPS score is used, it should be supplemented with additional questions to provide the company with insight into customer motivation so actionable items can be identified.
Although there are pros and cons to NPS, research studies show that NPS also correlates with business growth. Some studies have found that companies ranging from banking to car rental companies show higher income when they improve their Net Promoter Scores.
In any case, the NPS is straightforward, and it allows you to benchmark your company’s results against others in your industry.
When Zooma and our friends use NPS, we always use additional questions for insights and knowledge.
Do you want to know more about NPS?