Net Promoter Score (NPS) has become increasingly popular in recent years. As a business concept, NPS is relatively new, having been around for less than a couple of decades. It has gained traction because of its simplicity and the valuable insights it provides.
Fred Reichheld, a consultant from the international consulting firm Bain & Co and a Harvard Business School graduate, created NPS. Reichheld introduced his loyalty business model in 1996 with his book, "The Loyalty Effect." NPS gained further prominence with his Harvard Business Review article "The One Number You Need to Grow" and his books "The Ultimate Question: Driving Good Profits and True Growth" (2006) and "The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World."
Understanding NPS: Measuring Customer Loyalty
Unlike customer satisfaction metrics, NPS measures customer loyalty, which has been linked to revenue predictability. Any business, regardless of industry, aims to better predict revenue, and NPS offers a reliable way to gauge this.
How NPS Works: The Rating System
NPS relies on a single question rated on a scale from zero to ten: "On a scale of zero to ten, how likely are you to recommend this [product, service, leader, book, etc.] to a friend or colleague?" The scale starts at zero to avoid confusion about which end is high and which is low. This design helps eliminate ambiguity that could arise from scales starting at one.
The Psychological Edge of NPS
The NPS question taps into a different psychological aspect compared to a satisfaction question. While thrilled customers can be loyal, asking if they are satisfied sets a lower standard. The NPS question, however, challenges respondents to use their psychological capital to recommend something, knowing that their reputation is at stake if the recommendation doesn't go well. This risk to personal reputation makes NPS a more stringent measure of loyalty.
The Power of Word-of-Mouth
NPS focuses on loyalty, which translates to word-of-mouth advertising—a critical element for any organization. Positive word-of-mouth can provide free advertising, especially in the age of social media, where things can quickly go viral. Conversely, negative reviews can significantly impact a business's reputation and revenue.
Digging Deeper: The Follow-Up Question
To complement the NPS question, a second question is often asked: "What is the primary reason for giving the answer you did?" This allows respondents to provide qualitative insights, offering the context behind their scores.
NPS Score vs. Satisfaction Score
Understanding the difference between NPS and satisfaction scores is crucial. Although the scales might look similar, the ranges and calculations differ significantly. NPS categorizes respondents into Promoters (9-10), Passives (7-8), and Detractors (0-6). The score is calculated by subtracting the percentage of Detractors from the percentage of Promoters, resulting in a range from -100 to +100.
An Example to Illustrate NPS Calculation
Consider a training class with 25 participants that uses NPS on their evaluation forms.
- 20 people score 9 or 10 (Promoters)
- 5 people score 7 or 8 (Passives)
The NPS calculation would be Promoters - Detractors / Total Respondents * 100; NPS = (20 - 0) / 25 * 100 = 80
Now, if just one of those Promoters is instead a Detractor and gives a score of 6 instead of 9, and another one is a Passive and gives a score of 7 instead of 9 then:
NPS = (18 - 1) / 25 * 100 = 68
Addressing Misunderstandings About NPS
Many misunderstand NPS because of its distinct scale and emotional ties to numbers. Unlike satisfaction scores that range from 0 to 100, NPS ranges from -100 to +100, creating a 200-point spread. In some industries, an NPS of 74 is excellent whereas in other industries like telecom or airlines, an NPS of 20 might be considered good.
According to a 2018 report by Bain & Co, Amazon had the highest NPS of any retailer, but its scores varied between 45 and 57, depending on the department. In Canada, Lexus scored 87, Tangerine scored 57 and RBC scored 27. I wonder what those scores look like post-pandemic.
Conclusion: The Simplicity and Power of NPS
Despite seeming complex, NPS is straightforward: the question is easy to answer, the score is simple to calculate, and it correlates with revenue growth. Given its benefits, it's surprising that more businesses aren't leveraging NPS.
By understanding and using NPS, businesses can gain valuable insights into customer loyalty, predict revenue more accurately, and ultimately drive growth.
But Wait, There's More
A powerful way to use NPS is to gain significant feedback about the leaders in your organization. Ask members of the team and others who know the leader well to answer the NPS questions and you can gain a valuable new measurement.
With a tool this powerful, I’m not sure why more people aren’t using it.
