Net Promoter or Net Promoter Score (NPS) is a management tool that can be used to gauge the loyalty of a firm's customer relationships. It serves as an alternative to traditional customer satisfaction research and claims to be correlated with revenue growth.
"Net Promoter Score" is a customer loyalty metric developed by (and a registered trademark of) Fred Reichheld, Bain & Company, and Satmetrix. It was introduced by Reichheld in his 2003 Harvard Business Review article "One Number You Need to Grow". NPS can be as low as −100 (everybody is a detractor) or as high as +100 (everybody is a promoter). An NPS that is positive (i.e., higher than zero) is felt to be good, and an NPS of +50 is excellent.
Net Promoter Score (NPS) measures the loyalty that exists between a provider and a consumer. The provider can be a company, employer or any other entity. The provider is the entity that is asking the questions on the NPS survey. The consumer is the customer, employee, or respondent to an NPS survey.
How It Works
NPS is based on a direct question: How likely is it that you would recommend our company/product/service to a friend or colleague? The scoring for this answer is most often based on a 0 to 10 scale.
Promoters are those who respond with a score of 9 or 10 and are considered loyal enthusiasts. Detractors are those who respond with a score of 0 to 6 - unhappy customers. Scores of 7 and 8 are passives, and they will only count towards the total number of respondents, but not directly affect the formula. NPS is calculated by subtracting the percentage of customers who are Detractors from the percentage of customers who are Promoters.
Companies are encouraged to follow the direct question with an open-ended request for elaboration, soliciting the reasons for a customer's rating of that company or product. These reasons can then be provided to front-line employees and management teams for follow-up action. Local office branch managers at Charles Schwab Corporation, for example, call back customers to engage them in a discussion about the feedback they provided through the NPS survey process, solve problems, and learn more so they can coach account representatives.
Additional questions can be included to assist with understanding the perception of various products, services,and lines of business. These additional questions help a company rate the relative importance of these other parts of the business in the overall score. This is especially helpful in targeting resources to address issues that most impact the NPS. The NPS marketplace is dominated by providers that offer a full suite of metrics, reporting, analytics, best practices and consulting services. In the most advanced systems promoters are given the opportunity to promote immediately using social media connectors.
The primary purpose of the NPS methodology is to evaluate customer loyalty to a brand or company, not to evaluate their satisfaction with a particular product or transaction. Legacy survey methodologies have focused on the satisfaction of a customer with a particular transaction and are more subject to the mood of the customer and environmental factors such as news articles and competitor messaging. The ability to measure customer loyalty is a more effective methodology to determine the likelihood that the customer will buy again, talk up the company and resist market pressure to defect to a competitor.
When a provider factors in the customer acquisition cost to the overall profitability of a consumer account, the longer a consumer stays active and resists defection the more profitable the relationship can be for both parties. Measuring the value of the relationship after costs gives the provider a clear view of how to attract and retain the most profitable consumers and how to most effectively invest in and develop those relationships.
Net Promoter methodology also includes a process to close the loop. Closing the loop is a process by which the provider actively intervenes to change a negative perception and convert a detractor into a promoter. The Net Promoter survey will identify a detractor and should automatically alert the provider to contact the consumer and manage the followup and actions from that point.
Proponents of the Net Promoter approach claim the score can be used to motivate an organization to become more focused on improving products and services for consumers. They further claim that a company's Net Promoter Score correlates with revenue growth. Discussed at length in The Ultimate Question: Driving Good Profits and True Growth by Fred Reichheld, and "Answering the Ultimate Question" by Satmetrix Executives Richard Owen and Laura Brooks, the Net Promoter approach has been adopted by several companies, including E.ON, Philips, GE, Apple Retail, American Express, and Intuit. It has also emerged as a way to measure loyalty for online applications, as well as social game products.
A customer is able to leave comments in the surveys sent to them. This is what allows a company to use the VOC (Voice of Customer) to ensure that company is meeting the expectations.
The same methodology can be used to measure and evaluate employee satisfaction with their employer. Tracking and managing the internal score is a way that companies can keep a focus on their culture. This measures more than just an employee's satisfaction with common KPI (key performance indicator) points in the company. It expands to include the importance of various factors rather than just focusing on list of workplace issues to improve.
Criticism of NPS
Despite its popularity among business executives, the Net Promoter concept has attracted some controversy from academic and market research circles. Research by Keiningham, Cooil, Andreassen and Aksoy disputes that the Net Promoter metric is the best predictor of company growth. Furthermore, Russell Hayes (2008) claimed there was no scientific evidence that the "likelihood to recommend" question is a better predictor of business growth compared to other customer-loyalty questions (e.g., overall satisfaction, likelihood to purchase again). Specifically, Hayes stated that the "likelihood to recommend" question does not measure anything different from other conventional loyalty-related questions.
Environmental factors may exert an influence on customers' response to the "recommend" question—making comparisons across business units or industries difficult in certain cases. Examples include comparing businesses with an associated social stigma (e.g., cigarettes or online dating) and businesses with different levels of service fulfillment (e.g., delivery services as compared to gyms). Moreover, determining when the survey should be delivered may be more obvious in some cases than in others (such as in the case of a gym), where customer attitudes may be likely to change over time.
Others have taken issue with the calculation methodology, claiming that by collapsing an 11-point scale to three components (e.g., Promoters, Passives, Detractors), significant information is lost and statistical variability of the result increases. The validity of NPS scale cut-off points across industries and cultures has also been questioned.
Proponents of the Net Promoter approach point out that the statistical analyses presented prove only that the "recommend" question is similar in predictive power to other metrics, but fail to address the practical benefits of the approach, which are at the heart of the argument Reichheld put forth. Proponents of the approach also counter that analyses based on third-party data are inferior to analyses conducted by companies on their own customer sets, and that the practical benefits of the approach (short survey, simple concept to communicate) outweigh any statistical inferiority of the approach.
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