You may have heard of it but just exactly what is the Net Promoter Score and why is everyone talking about it?
This is an introduction to this widely used customer feedback metric and how you can use it to drive improvements in your business.
This is quite a detailed post and below are direct links to the key headings
- How to Calculate Net Promoter Score
- Where It Came From
- The Economics of NPS
- Why It is Good
- How to Implement NPS
- Survey Approaches: Relationship Vs Transactional
- How to Collect Net Promoter Score Data
- How To Analyse the Data
How to Calculate Net Promoter Score
To calculate the NPS® of a company you first need to add a specific question to your customer feedback survey. That question is:
On a scale from 0 to 10, how likely would you be to recommend our company to a friend or colleague?
The response is scored on an 11 point scale from Very Unlikely (0) to Very Likely (10).
Here is how the “would recommend” question typically looks in a survey.
Once you have the results, you convert them into the Net Promoter Score in the following way:
- Anyone that gave you a 0-6 score is termed a Detractor;
- Anyone that gave you 7 or 8 is termed a Neutral; and
- Anyone that gave you 9 or 10 is termed a Promoter
Then NPS = % of Promoters – % of Detractors or put another way…
Where It Came From
This is probably not like any other customer satisfaction score you have seen. So where did it come from?
The scoring methodology was first widely presented in a Harvard Business Review article titled: The One Number You Need to Grow in December 2003. The author of the article, Fred Reichheld, was well known in the customer loyalty industry and had performed some unique research.
He wanted to find out if one question could be used to predict a customer’s loyalty. So he asked tens of thousands of customers, lots of different questions, and then cross referenced their loyalty using actual purchasing data.
By testing different approaches, empirically, he discovered that NPS was most often the best indicator of customer loyalty.
This is quite a feat. Until that time organisations had been using “customer satisfaction” or complex calculations of several different variables to try to predict loyalty. In general customer satisfaction was found to be a quite poor predictor of customer loyalty. The other approach, complex calculations, was found to be accurate but difficult to implement and understand.
In identifying the simple approach, Reichheld had identified an easy to use metric that actually predicted customer loyalty.
Why You Use Net Promoter Score
NPS is useful for several reasons.
It simple to understand and calculate
Explaining the scoring system to people is very simple and takes only a few minutes. Also, staff typically “get it” very quickly. It makes intuitive sense.
It is possible to create more predictive scores on an organisation by organisation basis by using advanced statistical analysis and modelling techniques. The problem with these approaches is they are difficult for people to understand and act on.
It Correlates with Future Revenue
By far the most important benefit of NPS is that it predicts customer loyalty and therefor future revenue for the company in question.
In general, if you score goes up, so will your revenue. If your score goes down, so will your revenue.
This chart is a little complex, but it clearly shows that the organisations with the highest score have the highest revenue growth
From a business perspective this is very important because it means that if you can lift your score, your business will grow more quickly.
The Economics of NPS
The ability to predict customer loyalty means that this score can often be directly related to the value of a customer.
In fact, research across several industries have shown that there is a powerful connection between the Detractor/Neutral/Promoter status of a customer and their value to the business.
In this research Bain Consulting identifies that a Promoter is typically worth between 1.3 and 4.6 times as much as Detractors.
Other research by The Tempkin Group shows that Promoters are almost 6 times more likely to forgive a company if it makes a mistake and more than 5 times as likely to purchase again from the same company.
Our own research in the insurance industry shows that
- A one point increase in “Would Recommend” score results in a decreased of risk of termination by 7.8% and
- The risk of attrition for Detractor respondents is 1.5 times that of Promoter respondents
So the economic impact of understanding the NPS for your business and driving improvements can be substantial.
Just like any system, there are proponents and detractors for the use of the score. As a high profile system it has been researched substantially and much of the work published.
We have collected a lot of this research and provided a comprehensive list of links in this post:
How to Implement NPS
Implementing NPS is not just adding a new question to your existing customer feedback survey.
There are 5 stages to properly launch Net Promoter Score in a business.
For a detailed description of the process you can download our Business Leaders’ Practical Guide to Implementing Net Promoter.
Step 1. Initiate
The Initiate Phase is about confirming senior management buy in and creating the company structures that you need to drive change. In this phase you design the corporate governance structure that you will need.
Typically, you will need a couple of groups (Steering Committee and Process Team) to ensure the process continues long after it is launched. Each of these groups needs to understand their role in the process.
Change management is another key element of the Initiate phase. To be successful long term, you need to anticipate staff concerns and actively communicate the impact of the change on and to each staff member.
Step 2. Customer Strategy and Context
In this phase you will analyse your customer journey to design your data collection process:
- Which customers will you survey
- Which touch-points are important
- Where are your key opportunities to improve the business
Step 3. Listen and Service Recovery
Now you’re able to design your data collection survey and start collecting data.
It seems odd to design the survey at this point, half way through the launch, but it is only at this stage that you have all the information you need to properly design the survey and data collection process.
You also need to launch your Service Recovery process at this point. The impact on customer loyalty of contacting them after a poor score on a survey can be profound and you need to make that contact happen as soon as possible.
Service recovery is the process by which organizations react to and recover from a poor customer experience. Initiation of service recovery typically originates from direct customer complaints, social media messages, customer surveys and employee insights.
When implementing Net Promoter, service recovery is one of the first things to you should tackle because it has an amazing impact on your NPS and customer loyalty.
In our research (The 9 Secrets of Customer Feedback and Action) we identified that organisations which implemented service recovery as part of their customer feedback process had a more successful overall process.
CustomerGauge has identified that organizations which act quickly on service recovery gain an average of 10 points of Net Promoter Score.
It’s also simple to implement and will drive customer focused change management in your organisation.
Step 4. Quick Wins
If you have designed the process effectively, within a few days you should have some initial insights into what you can change in the business to improve customer loyalty.
These first items should be quick and easy to implement so you can show some quick wins to the rest of the organisation.
Step 5. Big Bets
With the process validated, and proof that it works, you can move on to larger opportunities.
Survey Approaches: Relationship Vs Transactional
To use NPS you add the Would Recommend question as the, typically, first question in your customer feedback survey.
Then there are two ways to run your collect the data.
Relationship NPS surveys are performed on a regular basis, say every 6 or 12 months. They measure your organisation’s overall score.
Transactional surveys occur after a customer has been through a transaction with your business. It could be a sale, business process or customer service interaction.
The benefits of Relationship surveys are:
- They give you understanding of your overall standing with the client
- They can be compared to other organisation scores to benchmark your progress. Note that you need to be very careful doing this, but it can be done.
The benefits of Transactional surveys are:
- They tend to be more actionable because they relate to a specific interaction. That way you can summarise all the data around an interaction and make improvements
- They provide an on-going data stream that helps with organisation engagement
- They tend to revolve around times when a customer’s perception of your business changes so are very relevant. It’s mostly at these interactions that customers loyalty will be improved (a good interaction) or destroyed (a bad interaction)
The disadvantages are that:
- It can be difficult to understand how to act on the feedback that is received.
- The process sometimes only generates results on a 6 monthly or annual
The disadvantages are that:
- It’s very difficult to compare data with other companies because of the specific nature of each interaction.
How to Collect Net Promoter Score Data
You have a couple of ways to collect your Net Promoter data.
General Purpose Survey Software
There are a large range of general purpose survey software options on the market. SurveyMonkey is probably the best known but there are many others.
Those applications can certainly collect the data. The issues occur when you are embarking on a transactional survey process. Sending invites, downloading feedback and creating reports daily can be a very time-consuming task to perform manually.
NPS Management Software
Dedicated software options (such as CustomerGauge (disclaimer: we are a CustomerGauge partner)) allow you to automate sending invites, receiving responses and sending reports.
The monthly fees for these tools are typically higher than general purpose survey tools. However, because they automate the data collection, analysis and reporting process they quickly pay for themselves in time saved.
Use short surveys – but not too short!
Because the approach is seemingly so simply, just one question, many organisations that start to use it have just add the “would recommend” question to their existing surveys believing this is all that is needed. This is a mistake and does not work.
The Net Promoter Score is an indicator of customer loyalty but measuring the score does not change it. I liken it to a car speedometer; it tells you how fast you are going but if you don’t have access to the brakes or accelerator you can’t do anything about it.
So, just collecting the score is a waste of time.
When you implement Net Promoter you need to collect just the score and also the reasons for the score. You can do this in several ways; qualitative feedback, additional scored questions, tagging of responses, etc. However, you do it, the why part of the feedback is essential to your success.
How To Analyse Net Promoter Data
Now that you have the data you need to analyse it to understand the changes that you need to make to improve customer loyalty.
If you’ve ever done a statistics course (at any level) you will have heard of sampling and confidence intervals. These terms help you to understand how closely the responses you receive, match the overall population.
Unfortunately, because NPS is a net score (remember, Promoters – Detractors) we need to do a little bit more maths.
That maths is beyond the scope of this post but here is a detailed explanation and a simple calculator you can use: How to calculate Margin of Error and other stats for NPS®
5 Whys style analysis
Over the years we have found that the Lean Methodology is an excellent way to analyse and act on customer survey data.
The 5 Why’s root cause analysis process is one of the simplest Lean tools and can be a very effective way to understand the drivers of customer loyalty.
It is a simple and methodical way to identify the root cause of an issue. The real value of the process is that it drives you to find and solve the underlying cause of the issue not just the obvious symptom.
It is also very easy to use and teach to others.
For a detailed tutorial on the 5 Whys process see this post: Whys Root Cause Analysis Template and Process