The Net Promoter Score (NPS) is a widely used market research metric that provides insights into customer loyalty and satisfaction. It was introduced by Fred Reichheld in his 2003 Harvard Business Review article “One Number You Need to Grow”. The simplicity and effectiveness of NPS have led to its widespread adoption across industries worldwide.
NPS Measurement
NPS measures the willingness of customers to recommend a company’s products or services to others. It gauges the customer’s overall satisfaction with a company’s product or service and the customer’s loyalty to the brand.
There are two types of NPS that you could use–transactional and relational. For transactional measurements, companies send out a survey after the customer has interacted with them and asked for feedback. The second type of NPS measurement is relational. Relational measurements are performed on a regular basis (quarterly or annually) to gauge the relationships that a company has with its customers. If a company wants a true measurement of customer satisfaction, relational surveys are the best route.
Regardless if a company is using transactional or relational surveys, NPS is calculated based on responses to a single question: How likely is it that you would recommend our company/product/service to a friend or colleague? The answering scale is from 0 to 10, with 0 being “not at all likely” and 10 being “extremely likely.”
NPS categorizes respondents into three groups based on their ratings:
- Promoters (score 9-10)
- Passives (score 7-8)
- Detractors (score 0-6)
The NPS is then calculated by subtracting the percentage of Detractors from the percentage of Promoters. The score can range from -100 (if every customer is a Detractor) to 100 (if every customer is a Promoter). A positive NPS (>0) is generally deemed good, a NPS of >50 is excellent, and >70 is considered world class.
In essence, NPS is a measure of customer perception that helps businesses identify areas of improvement and make strategic decisions to enhance customer satisfaction and loyalty. It’s a powerful tool for benchmarking performance and tracking improvements over time.
Types of Customers
When evaluating customer loyalty and satisfaction through NPS, customers are generally categorized into three distinct levels: Promoters, Passives, and Detractors. Each level reflects a different range of sentiment and likelihood to recommend the company’s products or services.
1. Promoters
Promoters are those customers who score a 9 or 10 on the NPS survey. They represent your most enthusiastic and satisfied customers. Here are some characteristics of Promoters:
- Likely to recommend your products or services to others
- Repeat buyers and loyal to your brand
- Contribute to positive word-of-mouth marketing
Promoters are considered vital assets for a company, as they help in organic growth through their recommendations and positive feedback.
2. Passives
Passives are the customers who give a score of 7 or 8. They are generally satisfied with your service but not enough to be considered enthusiastic promoters. Here are some characteristics of Passives:
- Not actively negative but are not as enthusiastic as promoters
- Might be open to considering competitors’ offerings
- Less likely to spread word-of-mouth recommendations, either positive or negative
While passives are not detrimental to your brand, they also don’t contribute much to its growth and can easily switch to a competitor.
3. Detractors
Detractors are customers who score between 0 and 6. They are not satisfied with your products or services and could potentially harm your brand through negative word-of-mouth. The following are characteristics of Detractors:
- Unlikely to purchase again or recommend your company
- Can dissuade potential customers by sharing negative experiences
- Can significantly impact your brand’s reputation
Because Detractors can negatively influence others’ perceptions of your brand, it is essential that you address their concerns with careful strategies.
Calculating the NPS
NPS is a straightforward yet insightful metric used by businesses to understand customer loyalty and satisfaction. Calculating NPS involves a simple formula and helps businesses to quickly gauge their customer experience.
The formula for calculating NPS is:
NPS= (% of Promoters) − (% of Detractors)
Here’s how you do it:
- Survey your customers asking how likely they are to recommend your product or service to others on a scale of 0-10.
- Categorize the responses into Promoters (9-10 score), Passives (7-8 score), and Detractors (0-6 score).
- Calculate the percentage of respondents in each category – Promoters and Detractors.
- Subtract the percentage of Detractors from the percentage of Promoters. This result is your NPS, which can range from -100 to +100.
Good NPS vs. Bad NPS
Determining what constitutes a “good” or “bad” NPS can vary depending on the industry and market norms. However, here’s a general guideline:
- Good NPS: An NPS above 0 is generally considered good because it means you have more promoters than detractors. An NPS of +50 is excellent and indicates that your company excels in customer satisfaction.
- Bad NPS: An NPS below 0 indicates that you have more detractors than promoters. This is a sign that a business needs to evaluate and improve its customer relations and services.
It’s important to remember that NPS is a relative measure and should be used as a starting point for understanding customer satisfaction and loyalty, rather than an absolute indicator of success. Regularly tracking and analyzing your NPS in conjunction with other metrics can provide more comprehensive insights into customer experience and business health.
Factors that Could Affect Net Promoter Score
NPS is a valuable tool for measuring customer loyalty and satisfaction, but it’s important to understand that various factors can influence your NPS. Being aware of these factors helps in accurately interpreting NPS results and making informed business decisions.
1. Niche Competition
Niche competition can significantly impact your NPS in several ways:
- Customer Expectations: In niche markets, customers often have specific expectations or preferences. If competitors offer something unique or better suited to these expectations, it can affect how customers rate your business.
- Comparison and Choice: When there are few competitors, customers tend to compare them closely. Superior performance or offers by a competitor in a niche market can sway your customers’ opinions, affecting your NPS.
- Brand Loyalty: In niche markets, customers often develop strong loyalties. If a competitor manages to break into these loyalties, it can lead to a decrease in your NPS.
2. Customer Tolerance Levels
Customer tolerance levels play a crucial role in determining NPS:
- Service Quality and Expectations: Customers have varying levels of tolerance regarding service quality, response time, and problem resolution. A lower tolerance level can lead to more detractors and thus a lower NPS.
- Change Management: How your business implements changes (like pricing, policies, or service alterations) can test customer tolerance. If not managed well, these changes can negatively impact NPS.
- Consistency: Inconsistent service or product quality can frustrate customers with low tolerance, affecting their likelihood to recommend your business.
3. Customer Life Cycle
The stage of the customer life cycle can influence their perception and, consequently, your NPS:
- New Customers: They might have higher expectations and can either become promoters if delighted or detractors if disappointed.
- Long-term Customers: Their experience over time plays a key role. Ongoing satisfaction can lead to high NPS scores, but any negative experiences can have a significant impact.
- At-Risk Customers: Those who have had issues or are considering competitors might score lower on NPS surveys.
4. Global and Local Events
Both global and local events can have a temporary or lasting impact on NPS:
- Economic Changes: Recessions or economic booms can change customer spending behavior and perceptions, affecting NPS.
- Cultural and Social Events: Events that shift public opinion or mood can also influence how customers perceive and interact with brands.
- Crisis Events: Situations like natural disasters or pandemics can lead to heightened emotions and stress, impacting customer responses and expectations.
Understanding these factors can help in contextualizing NPS scores and strategizing effectively to improve customer satisfaction and loyalty.
Benchmarking Your Net Promoter Score
Benchmarking your NPS is an essential process in understanding how your business performs in terms of customer loyalty and satisfaction compared to others. It helps you gauge where your company stands and what improvements can be made. Here’s how to benchmark your NPS effectively.
1. Compare it with the Industry Average
Comparing your NPS with the industry average gives you a sense of how well you’re doing against your competitors:
- Identify Industry Standards: Research to find out the average NPS in your industry. This information might be available in industry reports or market research.
- Analyze the Gap: If your NPS is below the industry average, it indicates a need for improvement in customer satisfaction strategies. An above-average score suggests you’re doing well in customer loyalty.
- Understand the Context: Remember, different industries have varying benchmark standards. For example, a good NPS in retail might be different from that in the finance sector.
2. Compare it within Your Region
Here’s how regional benchmarks can also provide valuable insights:
- Cultural Differences: Customer expectations can vary by region due to cultural differences. It’s important to compare your NPS with businesses within the same geographical area.
- Competitive Landscape: Regional comparison helps in understanding the local competitive landscape and customer preferences.
- Tailored Strategies: If your NPS is lower than regional competitors, you might need to tailor your strategies to better meet local customer needs.
3. Compare Your Survey Channel with Others of Higher Scores
Here’s how your survey channel can affect your NPS:
- Channel Effectiveness: Some channels (like email, phone, in-app) might yield higher response rates and potentially higher NPS scores. Compare your channel’s effectiveness with others.
- Response Bias: Different channels can attract different types of respondents. For instance, in-app surveys might attract more tech-savvy customers.
- Optimize Channels: If other channels are getting higher scores consistently, consider exploring those channels more extensively.
4. Compare Your Baseline NPS with Your Current NPS
Comparing your current NPS with your baseline (initial) NPS is crucial for measuring progress:
- Track Improvements: This comparison shows if your customer satisfaction strategies are working. An increasing trend is a good sign, while a declining trend requires attention.
- Identify Patterns: Look for patterns in the data over time. Are there specific periods where NPS goes up or down? This can help in pinpointing what drives changes in customer satisfaction.
- Continuous Improvement: Use this data for continuous improvement. Regularly tracking and comparing NPS helps in making informed decisions to enhance customer experiences.
Benchmarking your NPS is not just about numbers; it’s about understanding customer experiences deeply and using this insight to drive your business strategies. Remember, the goal is to improve customer loyalty and satisfaction consistently.
Creating an NPS Survey
Creating an NPS survey is quite simple, and there are templates that you can use to help create an effective survey. There is a template from Survey Monkey that will help you create a survey and collect the data from the survey.
When creating a survey, there are a few questions that you want to include to help understand your audience:
- Demographic Questions: It is common to ask questions such as age, gender, income, etc. to help with collecting data.
- NPS Question: This is the question that was introduced earlier that asks a customer how likely they are to recommend the company. In conjunction with asking this question, it is beneficial to give space to allow the customer to explain why they gave that score.
- Improvement Suggestions: Always give the customer an opportunity to give suggestions on how the company can improve. While you may not implement these suggestions, it is good to give each customer a “voice” in how to improve the company.
- Follow-up Questions: Include in the survey if the customer gives permission to answer follow-up questions if you feel that more explanation is needed. This will help to know who is interested in expounding on their survey.
As you create your survey, always keep the customer in mind. Keep the survey brief but informative so you can collect accurate data to help produce an NPS score that will identify your customer experience.
Using Your NPS Effectively
Once you have calculated your Net Promoter Score (NPS), the next crucial steps involve understanding and effectively using this valuable feedback. NPS is more than just a number; it’s a key indicator of customer loyalty and satisfaction and can guide you in making informed decisions to improve your business.
1. Focus on Qualitative Feedback
While the NPS provides a quantitative measure, the qualitative feedback that often accompanies it is invaluable for gaining deeper insights:
- Understanding the “Why”: Qualitative feedback helps you understand why customers gave a particular score. It offers context and reasoning behind their opinions and experiences.
- Identifying Specific Issues: Customers’ comments can highlight specific areas of satisfaction or concern, which might not be evident from the score alone.
- Guiding Improvements: This feedback can guide targeted actions to improve products, services, or customer experiences. For instance, if multiple customers mention long wait times, you know exactly where to focus your efforts.
- Building Customer Relationships: Responding to feedback shows customers that their opinions are valued, fostering stronger relationships and loyalty.
2. Listen to Customers
Using NPS effectively involves actively listening to your customers and integrating their feedback into your business strategy:
- Analyze Trends: Look for common themes or trends in the scores and feedback. Are there recurring issues or particularly appreciated features?
- Segment Responses: Break down the feedback by customer segments (such as by product, region, or demographic). This can help tailor your responses and improvements.
- Act on the Feedback: Implement changes based on the feedback. If customers are facing an issue, address it. If they love a particular aspect of your service, consider how you can enhance it even further.
- Close the Loop: Follow up with both detractors and promoters. Thank customers for positive feedback and inform detractors about the steps you’re taking to address their concerns.
- Measure Changes: After implementing changes, measure how your NPS is affected. This helps in understanding the impact of your actions and guides further improvements.
Effectively utilizing your NPS involves going beyond the score to deeply understand and act on customer feedback. It’s a tool to listen actively to your customers and make continuous improvements in your business, aiming always to elevate customer satisfaction and loyalty.
Additional Resources
If you enjoyed this article, I recommend joining my email newsletter. You’ll be notified when I publish other articles and helpful guides for improving your SaaS business. Submit the form below to sign up. Also, use the email icon below to share this article with someone else who might find it useful.
If you’re the founder and CEO of a SaaS company looking for help in developing a distribution channel strategy, please Click Here for more info.
How to Scale and Grow a SaaS Business