A Guide to the Net Promoter Score (NPS)

The NPS metric is a proprietary analytics instrument developed by Fred Reichheld, one of the owners of the NPS trademark.

The theory was first developed in 2001 as an attempt to present a single survey question that is easy to administer to vast numbers of subscribers and easy to track and interpret.

The primary objective is to infer customer loyalty based on users responding to a single question. This results in a metric that works simply and transparently, which makes it popular and widely adopted.

We can apply the Net Promoter Score concept to many things – our organization as a whole, but also individual products, locations, specific web pages, even employees in our customer support department.

Implementing NPS in our customer experience strategy allows us to use industry benchmarks to see how we’re doing compared to our competitors. This will help us better understand our target client base and work towards cultivating loyalty in our customers.

Understanding the Net Promoter Score (NPS)

The Net Promoter Score (NPS) is a metric to analyze customer loyalty and support our business growth planning process.

It’s similar to the Customer Satisfaction Score (CSAT) as it also looks at customer experience but from a slightly different angle.

It’s a one-question survey asking our users for the likelihood that they would recommend our products and services within their network.

There are two ways to set up an NPS survey:

  • Relational
    • Deployed regularly
    • It gives a periodic view of how our customers feel about our brand overall
    • Useful in benchmarking and tracking company performance over time
  • Transactional
    • Deployed after each primary customer interaction over the customer journey (purchase, support ticket, plan upgrade, and others)
    • Provides a more granular view on the customer experience and satisfaction
    • Increases focus on specific areas of the customer journey

Most analysts try to combine both types of surveys in their strategy, as they yield different results.

We can also use the Net Promoter Score to measure employee engagement and loyalty to our brand. We often refer to this metric as employee Net Promoter Score or eNPS. It’s crucial to understand that eNPS can’t replace more comprehensive employee engagement surveys as it lacks the necessary complexity. Still, it can give some directional insight into our employees’ alignment with the direction of our brand.

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The information and views set out in this publication are those of the author(s) and do not necessarily reflect the official opinion of Magnimetrics. Neither Magnimetrics nor any person acting on their behalf may be held responsible for the use which may be made of the information contained herein. The information in this article is for educational purposes only and should not be treated as professional advice. Magnimetrics and the author of this publication accept no responsibility for any damages or losses sustained in the result of using the information presented in the publication.

NPS Calculation

We ask some form of the question:

How likely are you to recommend X to a friend or colleague?

Where X can be a product, service, or the company as a whole. Usually, we ask about the brand name associated with any of these.

We add a 0 to 10 scale to score our customers’ likeliness to recommend our products or services.

To gauge the results, we split the responses into three categories.

Promoters (9-10) are enthusiasts loyal to the brand. They keep buying our products and promote us.  Passives (7-8) are satisfied but not enthusiastic enough to promote our brand actively. They are also vulnerable to competing offers and are at a higher risk of churning. We need to be extremely careful with Detractors (0-6), as they are generally unhappy and can cause severe damage to our brand by negative word-of-mouth feedback.

Using the above, we can calculate the Net Promoter Score as the difference between the percentage of Promoters out of the total respondents and that of detractors.

The NPS metric presents the customer base loyalty to our brand in a numerical form that can be between -100% and 100%, higher being better.

While we need to pay attention and take care of our Promoters, it’s paramount to also focus on the Detractors, as the only way to improve our NPS is to convert Detractors to Promoters.

Scores between 0% and 30% represent a good level of customer loyalty, but there’s room for improvement. In theory, any score above 0% is a ‘good’ score, as it shows the business has more promoters than detractors. And we usually consider scores above 70% to be great, meaning our customers love our brand.

On the other hand, we would consider anything below 0% to be a lousy score usually. However, it’s essential to have the context of what NPS is for the industry.

A Net Promoter Score of negative 2% may look bad, but if the industry benchmark is negative 10%, negative 2% starts to look much better. Even then, negative NPS means we need to focus significant resources on customer happiness and satisfaction.

Running Conditional NPS Surveys

With the technological advancements in recent years, we can now run more robust NPS surveys. A popular strategy is to ask a different follow-up question based on what score the client gives. Most commonly, we would split the follow-up questions as follows:

  • 0 through 8 responses will get a question asking how can we improve our product in a way that would increase their happiness with our brand
  • 9’s and 10’s will get a follow-up question on the main reason for the given score.

This way, our analysis can draw much more meaningful insights into our customer base and how to improve their customer journey.

We can either run the survey on our website while the customer is still there or send it after some time over email. The latter is a great option when we want the customer to spend some time with our product before rating it. This helps us then develop a more precise sense of whether our customers would recommend our products and services or not.

Our Net Promoter Score will most probably be different for various segments of our customer base. We can perform a Cohort Analysis on our customers. This will allow us to adapt our approach to specific cohorts to improve their NPS.

Reason for Answer

Other than the NPS survey question, we can add an optional open-ended question. It asks for the customer’s primary reason for giving a specific numerical score.

What is the primary reason for your answer?

We can then use those to analyze the factors that drive people to be promoters or detractors. To take it a bit further, analysts often rely on sentiment analysis on the text responses to understand customer notions. Otherwise, reading through potentially thousands of answers will become too time-consuming.

Optionally, we can take our survey further and ask an additional question in the lines of

How can we improve your experience?

This will help us accumulate suggestions to improve the customer experience.

Having open-ended questions means that fewer people will respond to those, but we will still be able to draw some insights and ideas on how to improve our clients’ journey with our brand.

Sometimes we can even infer the potential area for improvement if the customer responded only to the question about the reason for their score. Suppose the reason is that individual product offerings are too expensive. In that case, the solution might be to provide more pricing options – we can offer discounted bundles of various products that people usually use together.

If we plan a deep dive into the sentiment analysis, we may consider an optional request for our customers’ consent for us to contact them if we decide to follow up on specific cases.

The real value is in the answers to the follow-up questions and marrying those to the NPS scores. This helps us understand the context and the reasons behind a given score.

Analyzing NPS

The Net Promoter Score is a great metric to analyze our customers’ overall perception of our brand. It’s vital to track it to support the proper management and development of our customer experience.

If we add other metrics and additional insights from the customer journey, we can get a comprehensive view of our business performance in terms of the customer experience. Combining with customer retention and revenue retention rates gives us valuable insights to make more actionable predictions for customer loyalty.

The more ratings we collect, the more reliable our Net Promoter Score will be. We should aim for quite a lot, as we use a single answer to draw results, so we need a big enough data set to cover potential outliers or dishonest responses.

The Net Promoter Score (NPS) can help us predict future growth. If our NPS is higher than the industry average or it’s growing period over period, it’s a good signal that our clients are loyal to the brand. Such customers will generate more word of mouth as many will act as brand ambassadors, helping our business enter a growth cycle.

NPS is valuable as part of our strategic analysis, but it’s not enough on its own. Therefore we should look at it in combination with other metrics.

When we analyze the Net Promoter Score, there are two ways to look at it. We can benchmark against competitors and industry averages. However, it’s often difficult to find such information on other companies, so we tend to compare to the industry averages in most cases. Another option is to benchmark our performance to the previous period and analyze how the brand is doing over time.

The true benefit from the metric comes when we look at it over time and analyze trends, fluctuations, and patterns. Therefore, it is important to have a robust procedure that would allow us to track our brand’s NPS properly.

What influences NPS

A memorable customer experience is the only way to achieve growth in our Net Promoter Score. Nowadays, we have more and more options and plenty of competition. This makes it harder to provide memorable experiences, and overall, NPS has been decreasing over the last few years in many industries.

The metric works better in competitive industries. It’s easier to satisfy customers when they don’t have many alternatives.

Another significant influence on NPS comes from customer tolerance levels. By improving the overall customer experience, we can increase our customer base’s tolerance to service disruptions.

The switching barrier to other vendors is also a factor. SaaS companies generally get lower NPS scores as it’s harder to keep clients locked in with the low switching barrier. For example, if we rent a car and don’t like it, we can easily switch. However, if we buy a car, we can’t easily change it, so we are more biased towards liking it and recommending the car manufacturer (to support our initial decision).

Criticism of the Net Promoter Score

The Net Promoter Score (NPS) is prevalent amongst analysts when conducting market research.

However, many market analysts argue that NPS is statistically inferior to other metrics. Proponents of the metric state that this is outweighed by the benefits:

  • A short survey
  • Uses own customer base
  • It’s a simple concept to communicate
  • There’s an option to follow up with customers

In the academic world, NPS has less credibility in terms of reliability than in the business world. They claim that there’s no empirical evidence that ‘likelihood to recommend’ is a better predictor of company growth than other customer loyalty metrics like the Customer Satisfaction Score (CSAT).

Conclusion

The Net Promoter Score (NPS) is a measure that gauges a customer’s enthusiasm with a company. Its purpose is to help us maintain our relationship with our customer base.

Tracking our NPS over time can help the business improve customer service, support, logistics, and others, thus increasing customer loyalty.

To achieve better results, we need to look beyond the score itself and analyze the factors that drive it. It’s important to remember that the NPS is not enough. We need to analyze additional metrics to ensure we correctly understand our customers’ engagement with our brand.

Dobromir Dikov

FCCA, FMVA

Hi! I am a finance professional with 10+ years of experience in audit, controlling, reporting, financial analysis and modeling. I am excited to delve deep into specifics of various industries, where I can identify the best solutions for clients I work with.

In my spare time, I am into skiing, hiking and running. I am also active on Instagram and YouTube, where I try different ways to express my creative side.

The information and views set out in this publication are those of the author(s) and do not necessarily reflect the official opinion of Magnimetrics. Neither Magnimetrics nor any person acting on their behalf may be held responsible for the use which may be made of the information contained herein. The information in this article is for educational purposes only and should not be treated as professional advice. Magnimetrics and the author of this publication accept no responsibility for any damages or losses sustained in the result of using the information presented in the publication.

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