Sunday, June 9, 2013

Net Promoter® Score (NPS) - How to Measure Customer Loyalty?

The Net Promoter Score (NPS) is a customer loyalty metric developed* by Fred Reichheld. Net Promoter is a management tool that can be used to measure the loyalty of a firm's customer relationships. Customers can be divided into three categories say Promoters, Passives, and Detractors.
  • Promoters are loyal and enthusiastic customers who will keep buying and refer others, fueling growth.
  • Passives are satisfied but unenthusiastic customers. This category of customers is vulnerable to competitive offerings.
  • Detractors are unhappy customers who can damage your brand and impede growth through negative word-of-mouth.

The score can be used to motivate an organization to become more focused on improving products and services for customers. It has been used by recognizable businesses like GE, Phillips, Procter & Gamble, and American Express, etc. Companies with the most efficient growth engines such as Amazon, Dell , Harley-Davidson, TD Bank, Charles Schwab, Costco, Zappos, Vanguard etc operate at NPS efficiency ratings of 50 percent to 80 percent. NPS emerged as a way to measure especially loyalty for online applications, as well as social game products.

How to measure NPS ?

The Net Promoter score can be assessed for company, brand, products and services.

The score is calculated based upon one question by sorting respondents into Promoters (High), Neutrals (Middle) and Detractors (Low), then subtracting the percentage of respondents that are Detractors from the percentage that are Promoters.

NPS Question

Considering only your recent experience, how likely would you be to recommend the Considering only your recent experience, how likely would you be to recommend <Company or Brand or Product or service > to a friend or colleague? (0 is not at all likely, 10 is extremely likely)

 Not at All Likely (0)
 Extremely Likely (10)
Additional questions to collect more feedback to analyse the NPS.
1. What can we do in the future to earn a score of 9 or 10?
2. What is your gender?
3. What is your Age group
4. What is your Country and region

How to calculate NPS ?

  • 0-6   =  “Detractors”
  • 7-8   =  “Passives”
  • 9-10 = “Promoters”

To calculate your NPS, take the percentage of customers who are Promoters and subtract the percentage who are Detractors.

% of Promoters – % of Detractors = NPS

NPS can be as low as −100 (everybody is a detractor) or as high as +100 (everybody is a promoter). An NPS that is positive (i.e., higher than zero) is felt to be good, and an NPS of +50 is excellent.

How to Benchmark NPS?

Benchmarking your performance is the most fundamental aspect of Net Promoter success. To understand your Net Promoter Score, you must compare that score within your industry/sector and against direct and indirect competitors. Companies with scores higher than industry average or their competitors set grow faster and are more successful. There are published industry benchmarks are available like 

  • NPS by industry group
  • NPS by industry sector
  • Average NPS by sector.
Companies with a better ratio of Promoters to Detractors help to grow more rapidly than their competitors. The successfully running will have an NPS of 50 to 80. A negative Net Promoter Scores, which means that they are creating more Detractors than Promoters, and this is the reason why these companies can’t deliver profitable, sustainable growth even though they spend aggressively to acquire new business.

Why is Net Promoter Score important?

The Net-Promoter Score tracks how customers represent a company or product or service to their friends, associates, etc. This consumer representation is a kind free marketing that can highly influences your business growth. Know what your customers are saying to you and about you. Categorize comments and tag sentiments automatically to understand customer trends in real time and take immediate action. Segment customer feedbacks in meaningful ways by promoter/detractor, region, product, and more. Uncover the insights you need to make better strategic and tactical decisions to constantly improve the customer experience. Hence it is very important to Capture and act on customer feedback in real-time. Identify the customers or segments that are potentially at-risk, and channel issues to the respective groups/individuals for action. Analyse outcomes captured in customer responses to understand root causes and implement changes to build longer-term loyalty.

How the Promoters are important? 

It is important to address both promoters and detractors appropriately in order to improve the business. This has to be done by understanding the issues from both category by proper means and methods. It is important keep your promoters at the same time, try to convert your detractors in to promoters. Here are few important advantages of promoters 

  • Promoters have longer, more profitable relationships with a company. Hence the retention rate is very high. Promoters are more interested in new offerings and brand extensions than detractors. Hence they purchases more rapidly.
  • Promoters average order size is typically larger. They typically require less in sales, marketing and advertising costs. 
  • Typically promoters generate 80 percent to 90 percent of referrals. Quantify the proportion of new customers who selected your firm or product because of reputation or referral, and allocate the value of those customers to promoters
  • Promoters are often less price sensitive. Even then many loyal customers expect the best deal from you, others stay with you for reasons other than price. You should know which of your promoters are price sensitive and what impact that has on your financial performance.

*The Net Promoter Score is a registered trademark of Fred Reichheld, Bain & Company and Satmetrix.


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