What is NPS & How to Make it Useful

What is NPS?

The NPS tool is the benchmark business, customer relationship tool in widespread use in the business world for good reason.

NPS stands for Net Promoter Score. It is a management tool that is used to assess a company’s customer relationships, measuring the loyalty that exists between the business and the customer. In this article, we explain how it works and how to make this helpful tool work for your business.

Who created it?

The customer loyalty metric tool was created by Fred Reichheld, Bain & Company & Satmetrix in 2003 and serves as a substitute for customer satisfaction research.

It has been shown to have a correlation with revenue growth, hence why perhaps NPS has been widely adopted and is used by over two-thirds of Fortune 1000 companies. Today, NPS is the benchmark that companies use to measure and assess their customer loyalty.

How Does it Work?

NPS measures how likely a customer would be to recommend a particular business to family or friends. The NPS can also be used to help improve a company’s customer loyalty score, whenever it is lacking.

An NPS score ranges from -100, where every respondent is a detractor, to +100, where every respondent is a promoter.  NPS scores that are higher than zero is generally good, whereas negative NPS are perceived to be bad.

The NPS metric categorises customers into three types.

Promoter – a promoter is a customer who is happy and loyal. They will continue to be a customer and promote the company to their peers.

Passive – a passive customer is by in large happy; however, they can be easily swayed by another business with a good deal.

Detractor – a detractor is unhappy. They have had a negative experience with a business for whatever reason, and as a result, will unlikely be a future customer and may speak negatively about the company to their peers, warning them to stay clear.

The Net Promotor Score (NPS) is calculated solely based on the response to a single question: “How likely is it that you would recommend our company, product or service to a friend or colleague?” Generally, the answer is based on a 0 to 10 scale.

Scores of 9 and 10 are considered promotors, scores of 7 and 8 are deemed passives and ratings that are 0 to 6 are detractors.

The NPS is calculated by subtracting the percentage of customers who are considered detractors from the portion of customers who are deemed promotors. While the passives are not directly used to calculate the score, they do count towards the total respondent tally, consequently reducing the percentage of both detractors and promoters, pushing the score toward zero.

It is advised that companies follow up the likely to recommend question with a request for an explanation for a customer’s rating. Further elaboration or clarity is generally all that is needed to identify and improve opportunities for improvement.  

Why is it Useful?

It is understood that having strong customer loyalty is critical for a business’ growth. Therefore, it is a safe assumption that having a tool that can measure customer loyalty, would be a great benefit.

If you are a business that strives to deliver an excellent customer experience and you are looking to improve in this area continually, then incorporating the NPS into your business seems like a logical step.

The primary purpose of the NPS procedure is to predict customer loyalty, as shown by repurchases or referrals. It can also help you to evaluate how certain improvements or tweaks in your operations, influence your customer loyalty rating.

Critics of the NPS suggest that it doesn’t ask enough. Therefore, it doesn’t precisely spell out the reasons, why your customers are either happy or unhappy. This is why is it advised to ask some follow-up questions or conduct a follow-up customer satisfaction survey.

It is a good idea to have a follow-up plan. For example, if you discover your NPS is really low, what is your next step? Do you have a follow-up plan to help pinpoint the issues? Do you have systems in place to be able to rectify the problems, once pinpointed? The NPS can only prove to be an effective and useful tool if you implement an effective follow-up strategy.