What Is Net Promoter Score?
Net Promoter Score (NPS) is a widely used market research metric that measures customer loyalty and predicts business growth. It is a core component of customer experience management (CXM), providing insights into how likely customers are to recommend a company's products or services. By gauging customer sentiment, the Net Promoter Score helps organizations understand their brand perception and identify opportunities to foster stronger relationships, ultimately influencing revenue growth and overall profitability. This metric has become a crucial key performance indicator (KPI) for businesses across various industries.
History and Origin
The Net Promoter Score was introduced in 2003 by Fred Reichheld, a partner at Bain & Company. Reichheld's research aimed to find a simpler, more effective way to measure customer loyalty than traditional, often complex, customer surveys. His findings were popularized in the Harvard Business Review article "The One Number You Need to Grow," which proposed that a single question could serve as a powerful predictor of customer behavior and company growth.12
The development of the Net Promoter Score stemmed from a collaboration between Reichheld, Bain & Company, and Satmetrix. They sought to identify the "ultimate question" that best correlated with customer lifetime value and repeat purchases.11 This streamlined approach revolutionized how companies track and manage customer relationships, moving beyond mere customer satisfaction to focus on advocacy.10 Bain & Company highlights the system's role in helping companies earn customer loyalty and inspire employees to drive sustainable, organic growth. The History of Net Promoter®
Key Takeaways
- The Net Promoter Score (NPS) measures customer loyalty and willingness to recommend a company's products or services.
- It categorizes customers into three groups: Promoters, Passives, and Detractors, based on their responses to a single question.
- NPS is calculated by subtracting the percentage of Detractors from the percentage of Promoters.
- The score ranges from -100 to +100, providing a clear benchmark for customer sentiment.
- It serves as a tool for driving customer retention and identifying areas for improvement in the overall customer experience.
Formula and Calculation
The Net Promoter Score is derived from responses to a single question: "On a scale of 0 to 10, how likely are you to recommend [Company/Product/Service] to a friend or colleague?"
Based on their numerical rating, respondents are classified into three categories:
- Promoters: Customers who give a score of 9 or 10. These are loyal and enthusiastic individuals who are likely to generate positive word-of-mouth marketing.
- Passives: Customers who give a score of 7 or 8. They are satisfied but unenthusiastic and could be swayed by competitors.
- Detractors: Customers who give a score of 0 to 6. These are dissatisfied individuals who may negatively impact a brand through bad reviews or complaints.
The Net Promoter Score is calculated using the following formula:
For example, if a company surveyed 100 customers and found 60 Promoters, 20 Passives, and 20 Detractors, the calculation would be:
The resulting score is expressed as an integer, ranging from -100 to +100. 9Passives are included in the total number of respondents but do not directly contribute to the score.
Interpreting the Net Promoter Score
A Net Promoter Score provides a snapshot of a company's customer loyalty landscape. A score above 0 is generally considered good, while a score above 50 is excellent. A negative score indicates that a company has more Detractors than Promoters, suggesting significant issues with its products, services, or customer experience.
Higher Net Promoter Scores are often correlated with stronger business growth and sustainable competitive advantages. Companies with high scores tend to benefit from repeat purchases and customer referrals, which contribute to a healthy customer lifetime value (CLTV). Conversely, a low score signals a need for immediate attention and improvement, as Detractors can damage a company's reputation and hinder its ability to gain market share. Analyzing the qualitative feedback from customers, especially Detractors, is crucial for understanding the reasons behind their scores and implementing effective changes.
Hypothetical Example
Imagine a newly launched online financial advisory platform, "InvestRight," wants to assess its customer loyalty. After three months, InvestRight sends out a Net Promoter Score survey to its 500 active users.
The results are as follows:
- Users who scored 9 or 10 (Promoters): 250
- Users who scored 7 or 8 (Passives): 150
- Users who scored 0 to 6 (Detractors): 100
To calculate InvestRight's Net Promoter Score:
- Calculate the percentage of Promoters: (\frac{250}{500} = 0.50 = 50%)
- Calculate the percentage of Detractors: (\frac{100}{500} = 0.20 = 20%)
- Apply the NPS formula:
(NPS = % \text{Promoters} - % \text{Detractors})
(NPS = 50% - 20% = 30)
InvestRight's Net Promoter Score is 30. This positive score indicates that the platform has more Promoters than Detractors, suggesting a reasonably healthy level of customer loyalty. To improve, InvestRight would analyze the qualitative comments provided by Passives and Detractors to understand specific areas for improvement, such as streamlining the onboarding process or enhancing certain features.
Practical Applications
The Net Promoter Score is widely adopted across various sectors to gauge customer sentiment and drive improvements. In the financial industry, for instance, banks and investment firms use NPS to understand client loyalty, identify key drivers of satisfaction, and assess the impact of new services or policy changes. A high Net Promoter Score can indicate strong client relationships, leading to increased client retention and referrals, which are vital for sustainable business growth.
Companies also leverage NPS data to inform strategic decisions regarding product development, service enhancements, and resource allocation. For example, if NPS feedback consistently highlights issues with a particular mobile banking feature, the bank can prioritize resources to address that specific pain point. It's used by two-thirds of the Fortune 1000, illustrating its widespread acceptance as a metric for customer success. 8The Net Promoter Score (NPS) helps companies predict overall company growth and customer lifetime value.
7
Limitations and Criticisms
Despite its widespread adoption, the Net Promoter Score has faced several limitations and criticisms. One common critique is its oversimplification of complex customer sentiment into a single number, potentially overlooking the nuances of "passive" customers who are neither highly satisfied nor dissatisfied. Critics argue that identical NPS scores can sometimes mask vastly different underlying distributions of Promoters, Passives, and Detractors, making comparisons over time or across different business units misleading.
6
Academics and practitioners have also questioned the Net Promoter Score's statistical validity and its ability to accurately predict customer loyalty and future growth. Some studies suggest that NPS may not be as predictive of customer behavior or financial outcomes as its proponents claim.,5 4Furthermore, there are concerns that linking NPS directly to employee compensation can lead to "gaming" the system, where employees focus on obtaining high scores rather than genuinely improving the customer experience. 3The methodology itself has been criticized for not providing actionable insights on how to improve. 2Statisticians have also raised concerns, arguing that NPS displaces more rigorous market research processes and has done considerable damage to companies and their customers due to its oversimplified nature. What's Wrong with Net-Promoter Score?
Net Promoter Score vs. Customer Satisfaction Score (CSAT)
The Net Promoter Score (NPS) and the Customer Satisfaction Score (CSAT) are both crucial metrics in customer experience management, but they measure different aspects of customer sentiment. CSAT typically gauges a customer's immediate satisfaction with a specific interaction, product, or service. It's usually asked right after an event, like a purchase or a customer service call, and often uses a scale (e.g., 1-5 or "satisfied/dissatisfied"). CSAT provides quick, transactional feedback to identify immediate pain points.
In contrast, NPS aims to measure overall customer loyalty and the likelihood of future advocacy. It assesses the broader relationship a customer has with a brand over a longer period. While CSAT focuses on "how satisfied were you?", NPS focuses on "how likely are you to recommend?" 1Therefore, NPS offers a more holistic view of brand sentiment and potential for competitive advantage, while CSAT provides granular insights into specific touchpoints. Both metrics are often used together to provide a comprehensive understanding of the customer journey. CSAT vs NPS: which customer satisfaction metric to use
FAQs
How often should a company measure its Net Promoter Score?
The frequency of measuring Net Promoter Score depends on the company's industry, business model, and the customer journey. For transactional businesses (e.g., e-commerce), it might be measured after each purchase or significant interaction. For subscription-based services, quarterly or semi-annual surveys are common. Regular measurement allows companies to track changes in customer loyalty over time and assess the impact of improvements to the customer experience.
Can a negative Net Promoter Score be improved?
Yes, a negative Net Promoter Score indicates more Detractors than Promoters, highlighting areas that need significant improvement. By actively collecting and analyzing qualitative feedback from Detractors and Passives, companies can identify specific pain points and implement targeted strategies to convert dissatisfied customers into satisfied ones, eventually improving the score and driving business growth.
Is Net Promoter Score only relevant for large companies?
While the Net Promoter Score gained popularity among large corporations, its simplicity and focus on customer advocacy make it relevant for businesses of all sizes. Small and medium-sized enterprises (SMEs) can also benefit from understanding their customers' willingness to recommend, as positive word-of-mouth is a powerful driver of growth, especially in competitive markets. It helps any company gauge overall brand perception and identify loyal customers.