What is the Net Promoter Score (NPS)?
Net Promoter Score (NPS) refers to the metric developed by management consultant Fred Reichheld in the year 2003 with the objective to measure customer loyalty. It can be anything between a low of -100 (all customers are detractors) to a high of 100 (all customers are promoters), which indicates the willingness of customers to recommend a particular product or service to others.
- NPS helps in assessing the probability that a customer would endorse a particular company or its product and service to his or her colleagues, friends, or relatives.
- The underlying idea is that if the customer likes a product or a particular company, then he or she would share their experience with the people they know.
- Typically, the customers are surveyed and they are required to respond to a single question – “How likely are you to recommend our company or product or service to a friend or colleague?” and provide a score on an 11-point rating scale, where 0 indicates that they are not at all likely to recommend and 10 indicates that they are extremely likely.
How Does Net Promoter Score Work?
On the basis of the ratings that the customers provide, they are then classified into three broad categories:
- Promoters: They are loyal customers who keep buying and recommending to others that fuels growth. These enthusiasts give scores in the range of 9-10.
- Passives: They are satisfied customers but not very enthusiastic and as such are vulnerable to competitive offerings. They give a score in the range of 7-8.
- Detractors: They are unhappy customers who spread negative word-of-mouth that damage brand image. They give a score of less than 6.
How to Calculate Net Promoter Score?
It is calculated by subtracting the percentage of detractors from the percentage of promoters. Mathematically, it can be represented as,
Although the net promoter score is very popular among business executives, it also has its share of critics from academic and market research circles. Some of the criticisms are as follows:
- Various researchers claim that “likelihood to recommend” is not the best predictor of customer loyalty. In fact, there is no scientific evidence to state that it perfectly reflects overall customer satisfaction or their intent to purchase again.
- Some of the researchers question the credibility of an 11-point scale to measure customer preference. On the contrary, they claim that a 7-point scale is a better predictor of historical recommendations than an 11-point scale.
- It is believed that a metric that is calculated based on response to a single question is much less reliable when compared to a composite index of several questions.
What Is Good Net Promoter Score?
- The NPS can be benchmarked for different areas or products in order to assess where a particular company stands in the industry in terms of brand image.
- According to Reichheld, the average companies in the US score less than +10, while some of the best companies are able to achieve scores in the range of +50 and +80.
- However, it is very difficult to benchmark net promoter score as it varies considerably based on sector, culture, etc.
Importance and Uses
The net promoter score is a very important metric as it is used by most of the large companies as a tool to measure customer feedback. As an output it gives an easy-to-understand figure that can be used by managers to achieve customer delight (and not just satisfaction). In fact, some of the marketers believe that net promoter can be used as a proxy indicator of a company’s growth potential.
Some of the major advantages are as follows:
- NPS is considered a credible tool by most business managers as it was introduced by one of the leading management consulting firms – Bain & Company.
- Its output is easy-to-understand and easy-to-communicate, which means that one can easily tell what proportion of the customers are extremely satisfied with the product or service.
- Relatively easier to benchmark as most of the industry players use this popular metric. It can help companies determine their position in the competitive landscape and assess their gap from the established players.
- Some research suggests that the net promoter score has a strong correlation with a company’s revenue. It could be attributable to the fact that the implementation of this system helps employees to assess the gap and then strive for better customer feedback.
Some of the major disadvantages are as follows:
- It is very challenging to put a number against different levels of customer loyalty.
- The likelihood to recommend doesn’t guarantee recommendation. A person might give a score of 10, but later won’t recommend it.
- Researchers argue over the statistical validity of grouping an 11-point scale into three broad categories. In fact, there are debates on what qualifies a score of less than 6 to be classified as “detractor” and a score of more than 9 to be classified as a “promoter”.
So, it can be seen that although the net promoter score is considered a very useful management tool, on its own it may not be sufficient to draw strong insights. However, if used in conjunction with the right framework, it can provide valuable inputs for a company. Its USP is its simplicity that has resulted in a large number of companies using this tool on a regular basis.
This has been a guide to the net promoter score and its definition. Here we discuss how to calculate and how does net promoter works along with advantages and disadvantages. You may learn more about financing from the following articles –