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Net Promoter Score (NPS)
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The Net Promoter Score (NPS) is the key metric of the Net Promoter System. It is measured by asking "the ultimate question" that allows companies to track promoters and detractors, producing a clear measure of an organization's performance through its customers' eyes.
Net promoter score (NPS)
It essentially means on a scale of 10 how would a customer recommend your product or service to other people.
Types of NPS
ENPS: Employee net promoter score means how would an employee working in any capacity in a company recommend the product or service of the firm to his friends or colleagues. This is also a subset of employee satisfaction measurement.
NPS: It measures how likely the customer would recommend your product or service to their friends or colleagues.
For this blog, Let us stick to NPS
History
The NPS score was developed by Fred Reichheld who owns the registered NPS trademark in conjunction with Bain & Company and Satmetrix.
Charles Schwab, a financial services firm in 2004 had negative growth and the stock price was at record low.
The CEO of the firm wanted to understand the reason for such a situation and it turned out that they were lacking in communicating with their clients. They came to know by asking one simple question on how they would recommend their services to other clients and they saw a lot of detractors.
This led to them engaging with clients understanding their needs & they tried to align their services to them and the company by 2005 started to see positive growth.
From there on they created a closed loop system where they provide -
service
questionnaires for feedback,
analyze the results of feedback
try to resolve the issues in services or products.
They created a company database which would have all the feedback of customers to understand historically how their firm performed with efficiency of their service/product.
Method of calculation:
It has three components:
Questionnaire formulation: The questionnaire can be formed using any survey tool for e.g., Google surveys, Survey Monkey etc
- The key question which is asked is how would you/customer rate the product service friends and colleagues.
For example:
Segregation of respondents for evaluation:
Formulation & Interpretation of Score:
Final NPS score: Just subtract the percentage of Detractors from the percentage of Promoters.
For example:
If 20% of respondents are Detractors, 10% are Passives and 70% are Promoters, your NPS score would be 70-20 = 50
Scores can range from -100 to +100.
Usually a score of between 50 to 80 is considered good.
Significance:
Nps score helps to understand the brand relevance & relationship with its customers.
The business value chain is constantly evolving and changing and in order for the business to keep their core competencies intact without losing traction they need to understand the preferences of customers and should be able to either predict or have ability to mitigate the risks.
Usually for startups the scores are very high since they come up with attractive offers & solutions. But they are often short lived because as soon as they scale up in their business the attractive offers & solutions are often difficult to manage.
Even for larger organizations over the period of time they do face the same challenges!
For example:
Nokia in the early 2000’s was a leading player for cellular devices & they completely missed the smartphone android market!
Netflix had an NPS score of 68 and they lost 0.2 million customers in the first quarter of 2022 and they expect to lose around 2 million in next quarter. Source: The verge
And their counterparts Amazon prime & Disney-Hostar continue to have steady growth.
In both the cases there is one common aspect and that is “ Sudden” loss of traction & value.
While the counterparts are doing fairly well this sudden effect had an impact on aforementioned companies.
So what can be the reason?
Well there are numerous, but as stated earlier the business value chain is constantly evolving and in order to stay in line with it the company needs to identify how their USP & core competencies also evolve & maintain a healthy edge against the competitors!
All said and done, not all methods are perfect either!
The questionnaire based feedback mechanism often involves inherent biases.
The respondents might not be as interested in giving feedback.
Which question to ask is as important as to whom it should be asked.
What should be the sample size
How to engage with detractors are also important factors in using this methodology perfectly for getting optimal results.
There are strategies which mitigate the risk. But that’s for the next part of the series!
As they say in business only the paranoid survive!
Watch this space!
Author(s) :
Dr. Archit Shah
