The last time you ate at a restaurant, shopped for clothes, or purchased something online, the chances are you have come across the Net Promoter Score (NPS). So, what exactly is it?
What is NPS?
It is an easy-to-calculate customer loyalty metric that measures one’s willingness to buy from a company again and refer others. It was developed by Fred Reichheld in 2003. Today, companies of all sizes use it worldwide, including GEICO, Google, Apple Inc., American Express Co., and Costco Wholesale Corp., among many others.
Net Promoter Score has been shown to correlate with revenue growth rates as well as long-term profitability. The next questions you might be asking yourself are: How can you use this measure? What does it mean? What does it take to move the needle? This guide is going to answer all of those questions.
The Importance of the Net Promoter Score (NPS)
As previously mentioned, NPS is a measure of customer loyalty and is often used as a predictor of future growth.
According to Satmetrix’s Net Promoter Industry Benchmarks Report, companies with high NPS have an average three-year revenue growth rate that is seven times greater than the industry average. These companies also enjoy a 45% increase in profitability and a five-year shareholder return that is 108% greater than their industry peers.
NPS is also a valuable predictor of customer churn (the percentage of customers who leave a company). In fact, companies with high NPS scores have churn rates that are one-third the rate of their low NPS counterparts.
How the Net Promoter Scoring Works
The Net Promoter Score is calculated based on the responses to a single question. The question asks customers how likely they are to recommend the company’s product or service to others.
Customers are asked this simple question on a scale of 0-10. There are three categories: detractors who give a score of 6 or below, passives who respond with a 7 or 8, and promoters who rate the company a 9 or 10.
The Net Promoter Score is determined by subtracting the percentage of detractors from the percentage of promoters.
How to Calculate the Net Promoter Score (NPS)
Now that you know a bit more about what NPS is and why it matters, let’s look at how to calculate it.
The formula is simple. Divide the number of respondents who are promoters (9-10) by the total number of respondents and subtract the result from one.
In simple words, calculating NPS involves taking the percentage of customers willing to refer a product or service and subtracting from it the percentage of detractors.
NPS = Percent of Promoters – Percent of Detractors.
Below is the infographic from GetVoIP that gives a visual representation of how to calculate NPS, and some tips to improve it:
What are Promoters, Passives, and Detractors in NPS?
In general, customers in the Net Promoter Score divide into three categories:
- Promoters (9-10)
- Passives (7-8)
- Detractors (0-6)
Promoters are those who are happy with a product or service and are likely to recommend it to others. On the other hand, detractors are generally easy to identify — those who complain or give you bad ratings. It is important to identify why they are dissatisfied.
A common mistake that companies make is assuming that the cause of their dissatisfaction is obvious. For instance, if someone complains about a price or product, you might automatically assume it’s because he believes your company overcharges for its goods. However, that isn’t always the case.
In some cases, a customer may be upset because they think you’re not offering enough value for the price. The key is to really probe and understand the root of their dissatisfaction.
As for passives, they are customers who are satisfied but not delighted in the product or service. Finally, promoters are highly satisfied and likely to recommend your product or service in the future.
Are you familiar with NPS?