NPS – A comprehensive guide to understanding Net Promoter Score
Net Promoter Score (NPS) is a customer loyalty measurement method that lets you collect feedback from customers by asking them a simple question. Having loyal customers mean business growth and more profit. A study found that engaged and loyal customers buy 90% more often and spend as much as 60% more per transaction.
And a loyal customer is expected to stay with your business for an extended period. This also impacts your profit positively. According to a study, increasing customer retention by 5% will boost profit by 25-95%.
Ignoring loyal customers is the worst thing you’ll ever do.
NPS makes it easy to track and monitor the number of loyal customers you have. It provides you with actionable insights that you can use to convert detractors and passives into loyal customers. If you want to boost customer loyalty, customer retention, revenue, profit, and several other metrics, you need to master NPS.
This guide is all you need to understand and apply Net Promoter Score to your business.
What is Net Promoter Score?
Net Promoter Score was created by Fred Reichheld in 2003 to measure customer loyalty. The NPS has evolved over the years and was adopted by several leading companies around the world. It is much more than a mere loyalty score rather it is now transformed into a complete system to measuring loyalty and growing your business.
NPS is a survey-based customer loyalty score that ranges from -100 to 100. It consists of a single question that your customers have to answer:
How likely is it that you would recommend this company to a friend or colleague?
The respondents have to choose a relevant number between 0 and 10 to share their likelihood of recommending your company to a friend or colleague. Here is an example of NPS by MailChimp:
High NPS is desirable which is an indication that your company has a high number of loyal customers. If you have a low score, you can take steps to improve it.
Leading companies like Philips, American Express, Schwab, Intuit, and several others use NPS to become customer-centric by focusing on increasing customer loyalty. What makes NPS so popular and effective?
Here is a list of characteristics and features that make it the best customer loyalty metric for your business:
- It helps you measure customer loyalty effectively. It makes it easy for businesses to track customer loyalty with a single question. It is one of the simplest ways to identify loyal customers who will promote your business.
- NPS is a system that is used for business growth. It helps you make your business customer-centric by focusing on customer needs and improving customer experience based on feedback from your customers.
- It improves referral marketing by identifying the exact number of customers who will recommend your company to a friend. Airbnb used NPS to identify the customers who scored 10 on the NPS survey. It found that promoters were 13% more likely to rebook and 4% more likely to refer a friend.
- You can take the right decisions at the right time to engage detractors to engage them. Mention, for instance, used NPS to reduce churn rate by 50% in 2 months.
Can’t wait to use NPS for your business?
Sure you do… Let’s see how to calculate the Net Promoter Score and identify promoters.
How to Calculate NPS
You need to follow a systematic approach to calculate NPS for your business. Depending on your business size, you might have to distribute NPS to hundreds or thousands of customers. After you have distributed the survey successfully and as responses start to come in, you have to categorize them.
Responses are categorized to identify Promoters, Passives, and Detractors. Here is what these mean and how to categorize them:
Promoters are loyal customers who are most likely to recommend your business. These are the customers who respond with 9 or 10. Passives are customers that are likely to switch if they find a suitable alternative. You can identify Passives by selecting customers who respond to the survey with 7 or 8. Detractors are those who respond between 0 and 6. These customers aren’t satisfied and are more likely to churn.
Up next, you need to calculate NPS using the following formula:
NPS = (Percentage of Promoters) – (Percentage of Detractors)
Find the percentage of Promoters and Detractors. Subtract the percentage of Detractors from the percentage of Promoters to find your Net Promoter Score. You can use our NPS calculator that will find your score automatically. Enter the number of responses and the calculator will find NPS:
What is a Good NPS?
NPS doesn’t make sense unless you compare it with the industry benchmark report. Click here to check NPS benchmark scores by industry. If you are in the banking industry and your NPS is 50, it is higher than the banking benchmark of 34. This indicates you are doing exceptionally well than other businesses in your industry:
Comparing NPS with industry benchmark scores is essential to make sense of your score. Else, it won’t make sense. Even if your score is negative (which indicates that you have more detractors than promoters), it doesn’t necessarily mean your NPS is poor. In fact, it could be good or above average. There are industries where the benchmark score is negative such as internet service and cable TV.
So comparing your score with the benchmark is essential.
Generally, a positive NPS means you have more promoters than detractors which indicates a good NPS. The negative score, on the other hand, indicates more detractors than promoters and it is never a desirable situation of any business.
You should aim for positive NPS. The higher it is, the better. You can read more about good NPS here.
NPS Pros and Cons
There are several great things about NPS that make it the number one choice of businesses of all sizes. Here is a list of major benefits that you’ll enjoy with NPS:
- A simple and straightforward technique to measure customer loyalty.
- It works for all types of businesses irrespective of their industry.
- It is cost-effective.
- It is very helpful in identifying customers that will promote your business and ones that are about to churn.
- It is correlated with business growth.
- NPS provides you with actionable insights that you can use to improve customer experience.
Of course, it isn’t without drawbacks. Here are a few major disadvantages associated with NPS:
- It doesn’t tell you why detractors are detractors. This can be, however, done by collecting specific feedback.
- The responses can be biased. For instance, a customer might choose a low score due to a recent bad interaction with your company.
With all the ups and downs, the Net Promoter Score is one of the best ways to track customer loyalty and to find brand advocates. Companies use NPS to reduce churn rate and increase customer loyalty. The survey only helps you find the number of promoters and detractors, what you do next is what’s important.
Collect feedback from detractors to identify specific reasons that makes them detractors. Acting on customer feedback is what matters and will help you with business growth.