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. NPS has been widely adopted with more than two thirds of Fortune 1000 companies using the metric.
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Net Promoter Score is a customer loyalty metric developed by (and a registered trademark of) Fred Reichheld, Bain & Company, and Satmetrix Systems. 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
The Net Promoter Score is calculated based on responses to a single 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.
Those who respond with a score of 9 to 10 are called Promoters, and are considered likely to exhibit value-creating behaviors, such as buying more, remaining customers for longer, and making more positive referrals to other potential customers. Those who respond with a score of 0 to 6 are labeled Detractors, and they are believed to be less likely to exhibit the value-creating behaviors. Responses of 7 and 8 are labeled Passives, and their behavior falls in the middle of Promoters and Detractors. The Net Promoter Score is calculated by subtracting the percentage of customers who are Detractors from the percentage of customers who are Promoters. For purposes of calculating a Net Promoter Score, Passives count towards the total number of respondents, thus decreasing the percentage of detractors and promoters and pushing the net score towards 0.
Companies are encouraged to follow the likelihood to recommend 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.
Reichheld and Markey say the rating and answers to the "Why?" question provide all that is needed to identify reference customers and improvement opportunities. While this may be the case, the lack of any easy way to automatically analyze the verbatim answers without human bias is problematic. The response of many companies to the problem has been to add additional questions with rating scales.
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. Companies using the Net Promoter System often rely on software as a service vendors that offer a full suite of metrics, reporting, and analytics.
The primary purpose of the Net Promoter Score methodology is to evaluate customer loyalty to a brand or company. 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. Measuring loyalty can be done in several ways, and researchers have asserted that there are better predictors of actual recommendations than asking "likelihood to recommend." Since the purpose of Net Promoter is not to predict actual recommendations alone, but to predict the full suite of financially advantageous behaviors, proponents of the methodology do not find this troublesome.
Net Promoter System also requires a process to close the loop. Closing the loop is a process by which the provider actively intervenes to learn more from customers who have provided feedback, and also to change a negative perception, often converting a Detractor into a Promoter. In order to do this, the survey respondent can not be anonymous (something that can have a negative impact in the willingness to take the survey or to give low grades). The Net Promoter survey will identify customers who need some follow-up, including Detractors, 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. The Net Promoter approach has been adopted by several companies, including Australia Post, Siemens, 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.
Some proponents of the Net Promoter Score also suggest that the same methodology can be used to measure, evaluate and manage employee loyalty. They claim that collecting the feedback from employees in a manner similar to Net Promoter customer feedback can provide companies a way to maintain focus on their culture. What is sometimes called the "employee Net Promoter Score" or eNPS has been compared to other employee satisfaction metrics and some companies have claimed that it correlates well with those other metrics.
For some kinds of industries, notably software and services, it has been shown that Detractors tend to remain with a company and Passives leave. This appears to be the case where switching barriers are relatively high.
In the face of criticisms of the Net Promoter Score, the proponents of the Net Promoter approach claim 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, ability to follow up with customers) outweigh any statistical inferiority of the approach. Interestingly, they also allow that a survey using any other question can be used within the Net Promoter System, as long as it meets the criteria of sorting customers reliably into promoters, passives and detractors.
Criticism of NPS
While the Net Promoter Score has gained popularity among business executives, it has also attracted controversy from academic and market research circles.
The lack of a proven causal connection is a feature of all use of statistical correlation and regression techniques. They suggest where to look for causal connections but do not provide them on their own.
Research by Keiningham, Cooil, Andreassen and Aksoy disputes that the Net Promoter metric is the best predictor of company growth. Furthermore, Hayes (2008) claimed there was no scientific evidence that the "likelihood to recommend" question is a better predictor of business growth than 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. The customer metrics included in this study perform equally well in predicting current company performance."
Daniel Schneider, Matt Berent, et al. found that out of four scales tested, the 11-point scale advocated by Reichheld had the lowest predictive validity.
"A single item question is much less reliable and more volatile than a composite index." "Furthermore, combining CFMs (customer feedback metrics), along with simultaneously investigating multiple dimensions of the customer relationship, improves predictions even further."
"Recommend intention alone will not suffice as a single predictor of customers' future loyalty behaviors. Use of multiple indicators instead of a single predictor model performs significantly better in predicting customer recommendations and retention." "…given the present state of evidence, it cannot be recommended to use the NPI as a predictor of growth nor financial performance."