Understand your customer satisfaction levels over time, and build loyal relationships.
Net Promoter Score, or NPS, is an industry-standard measurement of customer experiences and predictor of future business performance. The metric is based on how customers answer the following question.
The NPS question is designed to test the emotional connection between your customer and your business (or brand). While some people read the question too literally, it is not asking your customer to make a recommendation now, but rather whether they feel positive enough about your business where they would make a recommendation, should someone ask.
Research shows that customer responses to this question fall into one of three behaviors, called "Promoters", "Passives", or "Detractors".
Net Promoter Score is calculated using the below formula, and produces a score that is a whole number between -100 to +100, where +100 is the best score.
Notice how NPS does not consider Passive customers, those customers who are on the fence in terms of their feelings about recommending your business to others. While NPS does not consider Passive customers, you should. Work to earn higher marks from Passive customers to turn them into Promoters.
NPS = (0 - 50) / 50 x 100
NPS = (50 - 0) / 50 x 100
NPS = (50 - 15) / 85 x 100
A NPS that is greater than 0 is considered OK. Any score below 0 means you've got work to do to improve customer satisfaction. In general, your goal is to strive to the highest NPS possible.
Every industry is different. It is best to compare your NPS to your peers and industry for a more relevant indication of your specific performance.
While some of us are over-achievers and we must get that 100 score, it is important not to fixate on just the metric. Listen to your customer's feedback, and take to heart their experiences both good and bad. If you're growing and learning by understanding your NPS, you're using it correctly.
There are several scales used with NPS questions, from the traditional 11-point numerical scale ranging from 0 to 10, the simplified 5-phrase scale from Very Unlikely to Very Likely, to the very simple 3-icons.
There are pros and cons to each scale. What is important is you choose a scale, and stick with it. When you constantly change scales, context can be lost rendering historical comparisons of NPS difficult.
PRO: Customers who won't ever give a top score can give a 9, which is still a Promoter. Use of 0 is hard for customer to confuse with a 'good' rating, hence minimizes incorrect choice.
CON: More granular choices makes it harder on respondent.
PRO: Fewer choices makes it easier on the respondent.
CON: Happy customers who never give top scores are grouped as Passive.
PRO: Very simple on the respondent.
CON: No granularity makes it hard to determine the degree to which a customer is (or is not) satisfied.
Here's a short video explaining How To Interpret NPS.
The NPS formula was developed after years of research by Bain & Company and Fred Reichheld and has become a worldwide standard metric of customer loyalty and satisfaction. They found customers who responded to the NPS question "How likely is it that you would recommend [brand or company] to a friend or colleague?" fell into 3 groups. Each group of customers exhibited different attitudes and patterns of behavior, warranting different actions or responses from the company surveyed.
Frederick F. Reichheld, et al, in the book, The Ultimate Question 2.0, writes:
Loyalty, after all is a strong and value-laden concept, usually applied to family, friends, and country. People may be loyal to a company that they buy from, but they may not describe what they feel in those terms. If they really love doing business with a particular provider of goods or services, however, what’s the most natural thing for them to do? Of course: recommend that company to someone they care about.
And this is why the question asks about likelihood of recommendation instead of simply asking if the customer is loyal to the company. It connects the two. And the way your own customers answer this question, helps you track their loyalty.
Here are some key takeaways from the Reichheld research:
Customers who answered the NPS with a 9 or 10 when using the Traditional 11-point scale (or "Very Likely" in the simplified 5-Phrase Scale) are called Promoters because the research shows they behave as such. These customers had the highest rate of repeat purchases and represented over 80% of referrals.
Customers who responded with an 8 or 7 (or simply "Likely") are called Passive customers and had far lower repeat purchase rates - typically 50% less than Promoters. These customers are not motivated by enthusiasm or loyalty and are more likely to move on to another company if a better deal comes along. They are excluded from the NPS calculation because Passive customers don't "move the needle". Gaining more Promoters drives growth, whereas gaining more Detractors drives decline. Gaining more Passive customers does neither. The action you take to convert Passive customers into Promoters (or Detractors) is what matters.
The last group of customers gave responses of 6 or below (or "Not Sure", "Unlikely" or "Very Unlikely" when using the 5-Phrase Scale). Reichheld called this group Detractors, because he found it typically represents over 80% of negative word-of-mouth comments. While they represent sales and profits, their comments hurt the reputation of the business, and push potential new customers away, and demoralizes employees.
Reichheld goes on to explain, for someone to make a personal referral, they must feel that a company offers superior value, and they must also feel that they have a good relationship with you. NPS identifies who these customers are. The relationship is determined emotionally, and the value is determined intellectually. When customers give you their loyalty, you are winning their hearts and mind.