February 21, 2019 Faith Christine Lai

Everything You Need to Know about Net Promoter Score (NPS)

Everything You Need to Know about NPS

Ever since Frederick F. Reichheld identified ‘Net Promoter Score (NPS)’ as the ‘one number you need to grow’, it has become one of the most prominent customer loyalty metrics in business. The NPS asks important questions that every business leader should know: how satisfied are your customers, and how likely are they to recommend your business or service to someone they know? In this article, we’ll explore the ins-and-outs of NPS, answering all of your questions about what NPS is, how to calculate NPS, and how to take advantage of its power.

What is NPS? How is it calculated?

The NPS is used to measure customer satisfaction. A tangible snapshot of how well a company is meeting consumer expectations, it provides helpful insights into how an enterprise can serve their customers better, or, alternatively, maintain high levels of customer satisfaction.

Here’s how it works. Customers are asked this question: “On a scale of 0–10, how likely are you to recommend [brand] to a colleague or friend?” Then, based on their responses to this question, customers are classified into one of three categories: detractors, passives or promoters.

‘Promoters’ are loyal customers who will not only consistently buy from a brand, but who will also urge their friends and family to do the same. ‘Passives’ are customers who are relatively satisfied with the service they’ve received, but who may patronise another company if given the opportunity. Finally, ‘detractors’ are customers who are actively unhappy with the service they’ve purchased, and who may tarnish the brand’s reputation through negative word-of-mouth.

The actual NPS score is calculated by taking the percentage of customers who are promoters, and subtracting the percentage of customers who are detractors, like so:

P – D = NPS

In theory, anything above 0 is a good NPS score, since a positive NPS indicates that you have more promoters than detractors – an indicator of potential growth. However, it is also important to benchmark yourself to your competitors, since average NPS scores vary across industries. A recent study across 109 companies in the Wellness and Fitness sector yielded an average NPS score of 77. If this figure is accurate, it would indicate that a gym or fitness facility needs to attain an NPS score close to 77 to remain competitive.

Why does NPS matter?

More than two thirds of Fortune 1000 companies use the NPS metric, a testament to how important NPS is for businesses. In addition, Bain and Company research has found that companies that achieve long-term profitable growth have a NPS that is 2 times higher than the average company.

A well-executed NPS strategy will also result in all-around better customer retention. Your NPS score gives you a clear and tangible assessment of how satisfied your customers are with the services you are providing. The score is also a good indicator of your customer retention rate – the more promoters you have relative to passives or detractors, the more likely you are to observe high membership retention rates and see membership growth via positive word-of-mouth.

Most importantly, NPS systems follow-up customer’s assessments of their willingness to recommend the brand with enquiries into the main factors that influenced their response. This is called key driver analysis, and looks into the specific areas of customer service that impact (or, indeed – drive) customer experience the most. Driver analysis is crucial for improving customer satisfaction and retention. With knowledge of what your key drivers are, you can focus company resources on what customers find the most important. This will allow you to be more effective in improving the experience of customers who are dissatisfied with your service and solidifying the support of those who are satisfied. This is crucial, since according to a study by consultancy Walker Information, customer experience (CX) will overtake price and product as the key brand differentiator by 2020.

Now that we’ve given you the run-down on what NPS is, here’s are two important points to keep in mind when executing your NPS strategy.  

Ask the right questions at the right times

How you conduct your brand sentiment surveys matters significantly in NPS strategy. For example, CustomerGauge discovered that phone interviews have some of the highest response and retention rates, that shorter surveys (2-6 questions) resulted in a 5.3% increase in response rate, and that customer retention increased 5.2% if customers were surveyed every quarter. In addition, utilising both relationship and transactional surveys resulted in a 4.9% average increase in retention.

If you’re going into an NPS strategy for the first time, be mindful of the details of how you’re surveying your customer base – they could make or break your data collection. If you’re already running an NPS system, re-examine your data collection strategy to see if there are ways to improve it.

Ensure answers drive action

Part of the beauty of NPS is that it gives you actionable data. Thus, it also follows that the effectiveness of NPS relies on you acting swiftly and decisively once the data collection and data analysis stages have elapsed. Within NPS systems, acting on feedback received is called ‘closing the loop’. There are many ways that one might set about ‘closing the loop’. Here’s one simple example:

Once you discover who your respective promoters, detractors, and passives are, design targeted communication strategies for each of these categories of customers. A strategy that works to address the gripes of a detractor will have a negligible effect on solidifying the loyalty of a promoter. Similarly, a detractor should not receive messages encouraging them to tell their friends about your brand; they will only say negative things! In contrast, a promoter should be encouraged in their ‘evangelistic’ efforts.

Even though NPS systems are powerful, they are only so if you’re willing to take a hands-on approach to business. The 2018 NPS® and CX Benchmarks Report found that 90% of companies close the loop in some way, and enjoy higher retention as a result of their efforts. However, companies that don’t close the loop increase their churn a minimum of 2.1% per year – yikes!

This article should’ve told you all you need to know about NPS. If you’re serious about improving your customer retention rate, get started as soon as possible on implementing and executing an effective NPS strategy – it’ll be worth the investment.