Wouldn’t it be great to have just one simple measure of business success? What determines success in most businesses is whether customers like and buy the products and services offered. This is where the Net Promoter Score (NPS) comes in. Many argue, that it is THE most important indicator of business success.
That’s a big claim and warrants a closer look at what the NPS is, why it’s a good measure, how to measure it, and how it can be improved to really become a key indicator of business success.
What is it?
The Net Promoter Score (NPS) is based on the fundamental premise that customers can be divided into three groups:
By asking one simple question — How likely is it that you would recommend [Company X] to a friend or colleague? — an organization can track these groups and get a clear measure of their performance through its customers' eyes.
Why is it a good metric?
Empirical research has shown that there is a striking correlation between the customer grouping and actual behaviour – repeat purchase and referral patters - over time.
Further research mapped the NPS rating to the growth rates of an organization with high NPS scores and their competitors. The results showed that in most industries, this one simple statistic explained much of the variation in relative growth rates; that is, companies with a better ratio of Promoters to Detractors tend to grow more rapidly than competitors.
NPS is a straightforward metric that holds companies and employees accountable for how they treat customers. When combined with appropriate diagnostics and follow-up actions, it drives improvements in customer loyalty and enables profitable growth.
How do I measure it?
NPS is collected using a survey (mail based, internet or phone) asking respondents to score the question “How likely is it that you would recommend [Company X] to a friend or colleague?” using a 0 to 10 scale.
You can then calculate your NPS by taking the percentage of Promoters and subtracting the percentage of Detractors:
Net Promoter Score = % of promoters - % of detractors
How can it be improved to become a key business metric?
What is great about using the NPS is that you get a simple numeric score that you can benchmark with competitors, your industry, etc. However, in order to become truly useful, we need a little more:
We have to go beyond the numbers. When I help clients develop measurement systems I always recommend expanding the NPS with two open questions:
This way, you get the information about the things that drive customer satisfaction as well as insights into the things customers don’t like. Having a number is interesting but without the context of what customers really like and dislike, you will struggle to act on the insights.
Make sure you measure the financials. Great customer experience and customer loyalty is one thing, but if those happy and loyal customers are not making you any money then your business is still failing. One of my clients, a large retail bank, found out that most customers would recommend them, but 80% of them were not profitable! This means we need to look at customer profitability as well as overall financial performance to make NPS meaningful in a business sense.
Go beyond existing customers. It is all well and good asking your existing customers whether they would recommend you and what they like and dislike. However, for every customer you have there are others out there who decided not to buy your products or services and maybe go to a competitor instead. By only asking existing customers you introduce a massive bias into your data. To get a full picture of performance it is vital to also understand the views of non-customers.
The NPS is a wonderfully simple indicator of customer delight and an important leading indicator of business success. However, it has to sit in the context of broader customer feedback around the things customers like and dislike as well as the ultimate measures of success: revenue growth and profit margins. It is most useful as part of a well-balanced business performance management system.
What do you think? Does this make sense? Have you had any (good or bad) experiences with using NPS? Please share your views...
Finally, here is a great little video explaining the Net Promoter Score: