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by Jack Miller on 20 Jul 2018

Find out how to calculate it, why it matters and what it can do for your organisation

Ultimate Guide to NPS | Chapter 1
Ultimate Guide to NPS | Chapter 1

The following article is part of The Ultimate Guide to Net Promoter Score. The Net Promoter Score (NPS), is the world’s leading metric for measuring customer loyalty and happiness. In this article, we give a primer on what the net promoter score is and how to calculate it.

Introduction

In 2003, Frederick F. Reichheld introduced the concept of NPS in the seminal article ‘The One Number You Need to Grow‘. Following two years of research, measuring the link between survey responses of individual customers of a company and those individuals’ actual referral and purchase behaviour. Reichheld and his team found one question was correlated directly with differences in growth rates amongst competitors in multiple industries, “how likely is it that you would recommend [company X] to a friend or colleague?”.

It was a tipping point in the industry. A path to profitable growth lied in a company’s ability to get its loyal customers, in effect, to become their marketing department. Companies that enjoyed the highest rate of growth had the highest net promoter percentages among its competitors.

Reichheld found that a simple single question was able to show a correlation between NPS and long-term-growth. It has now become a key performance indicator (KPI) for many industry leaders to understand customer loyalty. When combined with an open-ended question it provides and an actionable metric for enhancing your customer experience.

Indeed, other factors besides customer loyalty contribute to companies growth, economic or industry expansion, innovation and so on. While it would be a bold claim to say it guarantees growth, in general, it can’t be achieved without it.

It’s now widely accepted that a simple real-time feedback loop is essential for businesses to measure loyalty and to use the Net Promoter Score (NPS) to measure customer loyalty has undoubtedly become industry best practise.

The Survey

Net Promoter Score (NPS) is a seemingly simple yet effective way for companies to track and measure promoters and detractors to produce a clear measure of their performance through the eyes of the customers.

NPS is built on the basis that every company can divide their customers into three distinct buckets - promoters, passives and detractors and customers are categorised based on their response to the standard NPS question - “How likely is it that you would recommend us to a friend?” on a scale of 0-10.

Chattermil NPS Scale

Once you’ve identified your Promoters, Passives and Detractors with your NPS survey, close the loop with personalised follow-up communications to each group.

The follow-up communication is critical. NPS is not about a number but about learning and improving. Understanding the drivers behind the score provides vital insights into why people are loving or hating your product. The second follow up question is what gives NPS its one-two punch, and allows you close the feedback loop.

The goal is to discover patterns inside the data. For promoters, just do more of what works. For detractors, do less of what’s causing customers to leave your product. For passive, just ‘ignore’ them for now. If you work on decreasing detractors and increasing promoters, you’ll address the passives over time. The primary goal is to identify pain points in your system that are creating repeatable results.

The cool thing about growing your NPS is that if you continue to improve it, you will have more and more people going around saying your product is excellent. But be warned, growing your NPS is hard and you won’t see results overnight. It requires a long-term effort. Very few companies have been able to systemise promoter growth. We’ll explain further on in the guide how other companies have achieved this feat.

Net Promoter Score Calculation

Your NPS is calculated by subtracting your percentage of detractors from your percentage of promoters. The best possible NPS is +100, and the worst is -100. Your passives are excluded from the calculation since their loyalty is relatively neutral.

Responses can be defined into three distinct clusters that represents different attitudes, sentiment and economic value.

Promoters (scored 9 - 10):

Promoters are your biggest fans. They actively advocate your product on your behalf, bringing in the majority of referrals, and are far more likely than any group to remain customers. Their Customer Lifetime Value (CLV) is far greater than any others.

Passives (scored 7-8):

Passives are satisfied for the time being, but can defect at any time. Their referral rate is as much as 50% lower than promoters, and those referrals are of far less quality. Their CLV is also usually less than half that of promoters.

Detractors (scored 0 - 6):

Detractors are unhappy customers and account for more than 80% of negative word-of-mouth opinion. They have the highest rates of churn and defection and harm your company’s reputation, putting off new customers.

NPS Calculation

The Net Promoter Score is a simple and straightforward metric that can be shared throughout the company with every function and team. You can also track by product, store, team, geography and more to focus on the goal of improving customer experience.

If you have more detractors than promoters the score will be negative and likewise positive for more promoters than detractors. Lower Net Promoter Scores can be indicators of harmful customer experiences leading to potential losses of revenue, whilst higher Net Promoter Scores suggest a stronger performing business.

Economics of NPS

Striking the balance of promoters and detractors through Net Promoter Scores is clear. Promoters will actively advocate your business on your behalf, repeatedly purchase and refer you to friends. They not only bring in the most revenue, but are also most likely cheaper to manage than detractors.

Detractors will cost you money both in terms of damaging your brand and also the resources required to deal with their complaints. They are also more than likely to not purchase repeatedly.

economics of nps

The Net Promoter Score accounts for between 20% and 60% of organic growth for companies and on average the industry leader’s NPS is twice that of its competitors.

It has also been found that promoters are more than 6x likely to forgive, are more than 5x as likely to repurchase and 2x more likely as detractors to recommend a company.

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    Jack Miller

    As a CX Analyst, I work with companies designing their customer journeys to ensure they are both comprehensive and accurate. Applying cross sector best practices and an understanding of each business’s unique relationship with their customer base, I focus on identifying what elements need to be put in place to take each organisation from their current level of customer understanding to a best in class understanding of all customers.