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Organizations Should Focus on NPS
Net Promoter Score (NPS) is a customer loyalty metric introduced in 2003 by Fred Reichheld, a partner at Bain & Company. The goal was a simple and effective way to measure customer loyalty. The score can reveal much more than loyalty, and it can also provide a comparison metric, even across sectors.
The concept behind NPS revolves around a single question: "On a scale of 0 to 10, how likely are you to recommend our company/product/service to a friend or colleague?" Respondents are then classified into three categories based on their scores: Promoters (score 9-10), Passives (score 7-8), and Detractors (score 0-6).
NPS is then calculated by subtracting the percentage of Detractors from the percentage of Promoters. Scores range from -100 to +100, and higher scores indicate higher loyalty — and satisfaction.
What Loyalty Really Means
Measuring customer satisfaction should be even simpler, but it’s not. The key to understanding the value of NPS is understanding loyalty. Many wrongly assume that repeat customers are loyal. There are lots of reasons why non-loyal customers may be repeat customers. For example, repeat business could be simple inertia, indifference, exit barriers, or external switching costs.
Loyalty is much more and involves factors such as satisfaction, trust, and long-term value. A loyal customer may choose to stay with a supplier despite a higher price due to an overall, larger experience. Loyalty positively impacts profitability, by reducing customer acquisition costs, and also contributes to top-line growth via reduced churn. Loyal customers tend to increase their spending over time and recommend the company to their networks, which enhances brand reputation.
NPS asks about the willingness to recommend the business because when customers recommend a company, they put their own reputation at stake. Often, People recommend brands associated with positive experiences long after the commercial relationship ends.
Benefits of NPS
Some of the benefits of NPS include:
- Simplicity: A single question that’s powerful and easy to compare within and across sectors.
- Customer Satisfaction Score (CSAT): it can provide a gauge of customer satisfaction, and help organizations take steps to improve it.
- Reduced Churn: NPS allows organizations to focus on reducing customer churn by investing in creating a memorable customer experience.
- Growth: NPS provides actionable feedback to drive sustainable business growth. Evaluating NPS over time helps measure and enhance customer loyalty.
Despite years of proven success, there’s a tendency in organizations to complicate matters. There’s a natural tendency from vendors and enterprise organizations to introduce complexity or adopt proprietary scoring mechanisms. This should be avoided.
Let’s look at some of the popular alternatives.
CSAT instead of NPS
This seems reasonable on the surface, here we simply ask if the customer is satisfied. It is easy to measure and versatile, allowing customization for different aspects of the business. However, it lacks insight into overall customer relationships and tends to have short-term relevance.
Customer Effort Score (CES)
CES measures the ease of using a product or service. It asks customers to rate the level of effort required. CES provides a simple calculation and covers various sources of customer annoyance. However, the subjective nature of effort and the lack of detailed insight into specific friction points are limitations.
Churn measures the number of customers who do not renew their business with a company. It directly impacts the bottom line and attracts attention from executives. However, calculating churn varies across companies, and customers can churn for reasons unrelated to satisfaction.
Customer Health Score
A customer health score indicates which customers are satisfied (“healthy”) and which are struggling, enabling targeted support from the customer success team. The score can be customized based on specific needs and priorities, but benchmarking across industries is challenging.
Product Engagement Score (PES)
PES measures the average engagement level of customers based on factors like stickiness, feature adoption, and retention. It is easy to track over time and doesn’t require direct customer feedback. However, customer satisfaction may not always align with engagement levels, and limited benchmarking data is available.
Companies can customize the traditional NPS method by adjusting the scale, criteria, or survey questions. This allows tailoring to specific needs without starting from scratch. However, the comparability with standard NPS metrics diminishes when variations are introduced.
Here, a vendor believes they have better methodologies and insights with their proprietary technology. This is conceptually similar to a credit score, which is a useful metric, though few understand the underlying mechanisms. The issue is the methodologies of a proprietary algorithm are not clearly understood and will change over time making it difficult to compare across sectors and time periods.
As a single metric, NPS holds the key to growth and its impact is both straightforward and significant. There’s simply no need to add complexity or pay for advanced tools. To achieve sustainable and profitable growth, simply focus on creating more promoters and reducing detractors while ensuring transparency of your net-promoter number across the organization.
Dave MIchels is a Contributing Editor and Analyst at TalkingPointz.