Friday, June 2, 2023

NPS 101 – What Is a Net Promoter Score?

If you run a business then you know how important customer satisfaction is. How you present your products and how you handle customer issues should be key parts of your day to day business strategy. I used to work in tech support, and thus lived and died on the satisfaction of my customers. I remember advising them on their customer feedback forms, when I thought I had done particularly well, because I knew that when you do something right it is taken as a given, whereas if you do poorly they will nail you to a wall. There were a number of questions on the from, six if I remember right, all of them relating to not only my performance, but also the customers opinion of the business itself. Imagine my surprise when my Business Studies graduate partner told me that the current school of thought regarding customer feedback forms is that only one question matters.

NPS 101 – What is a Net Promoter Score? – NPS 101

One question: How likely is it that you would recommend our company/product/service to a friend or colleague? That is what NPS is. At its core, using basic statistics and a short form to figure out how well you can expect your business to grow. I love the concept, even if there are a few issues with the implementation. It is an alternative to traditional customer satisfaction metrics, designed to gauge consumer loyalty. There is more to loyalty than simply having a repeat customer, though those are nice. When you are dealing with thousands, if not millions, of customers per diem and you have more than half saying that they intend to recommend your business to a friend, then the law of diminishing returns tells you to expect slow and steady growth over time. So far so easy.

The metric was developed by Fred Reichheld, famed author of several books focusing on the importance of consumer loyalty and has been around since 2003. The scale is between -100 and +100, with higher numbers being better, considering they are aiming this method at the golfing crowd I can’t help but feel like they missed a trick there. Fred Reichheld, and Bain & Co., claim that a positive NPS score has been correlated with customer growth, and by extension business growth.

A customer feedback form with one question on it, the above mentioned, scored between 1-10. Those who answer 9 or 10 are called promoters, and are said to have value creating behaviors, such as recommending your product of service to friends or just buying more of the product. 0-6 are called detractors, and rather than simply stating that they will hurt your business, the fine folks over at NPS say that they are less likely to exhibit value creating behaviors. From my perspective if someone is giving you a sub 10/10 then they are going to be dissuading folks from buying what your selling, but I digress. 7-8 are called passives, and are considered the wild cards.

Working out your NPS based on one round of forms is a simple matter, subtract the percentage of Detractors from the percentage of Promoters, with the passives adding to the bulk, thus lowering both the percentage of Promoters and Detractors, bringing the end result closer to zero. If you’re in negative numbers then there is something seriously wrong with how you treat customers, and can expect a slow downturn in revenue. If you are in positives then you can expect growth.

The core issue with the negative scores is that it does to take into account the market you are in. In markets where switching costs are high, like database development, then your detractors are not likely to leave you anyway. The information is still useful, but I feel this example cuts close to the core issue with the metric. Its simplicity does not address the nuances of the thing it is trying to explain.

NPS 101 – What are the Downsides to NPS?

There is a final step in all this. The closing of the loop. The real benefit to this, from my perspective, is being able to find the customers on the fence, or the customer who are dissatisfied, and take steps to remedy the issues they have with your firm. Unlike other customer feedback methods NPS is not anonymous. This does make it a touch more difficult to get people to agree to it, but seen as it is only one question the ease with which the customer can complete the form should be ample encouragement. Once you have a list of detractors you can start reaching out to them, and make you attempts to turn them into promoters. How you go about doing that depends on the market you are in.

The first thing I thought when I read up on this customer feedback collection method was that it felt like a fad diet. It’s so stripped down, and the marketing forces behind it are all so strong. It wants me to buy into the dream, that all of the old ways were stupid to overlook the one thing that will fix your failing business. When it comes to providing for your customers, and maintaining your consumer base, you have to take into account so many things. Anyone that has read into Customer relationship management knows how complicated a field it is. Like a fad diet, NPS feels like it should be right, but I do not think you should rely on it solely. You will not get the most accurate results using only NPS. If you use it in conjunction with metrics deemed superfluous by the creators of NPS then you will have the most accurate prediction on the future of you firm.

There are already a huge number of users of this method, with a reported two thirds of the fortune 1000 having NPS implemented into their business model. I think it is safe to say that those fortune 1000 firms have not thrown out their other metrics, and have simply added NPS to their no doubt huge number of customer feedback collection methods. I think NPS is useful, it is another data point, and one that is much easier to get than others. But I also think that using it solo is a bad idea. There is a new market opened up by Fred Reichheld et al; the NPS expert, and as a result there are so many option out there to help advise you on the metric, to help you implement it effectively, and while all forms of market research have their own little economic ecosystem, most of the others are far more complicated, requiring extensive statistical knowledge.

NPS 101 – Should I Use NPS?

At the end of the day customers respond to good service and good products. If you provide both then your business will grow. So many of these customer feedback services are designed to obfuscate the core reason your customers come back, or more often the core reason your customers don’t come back. You have exploited them, or you have sold them a lemon, or you have treated them poorly. It doesn’t take market research to figure that out, when you are selling lemons, or providing bad service then someone, somewhere down the line knows about it.

All that said, I believe that market research, and customer feedback, is important when you are trying to understand the thoughts and feelings of a wide variety of customers. Gaining information on your core selling demographics can pay out dividends in the long run. It means that were I to design my own NPS style form, as all companies using do, then I would include a few more questions than the core How likely is it that you would recommend our company/product/service to a friend or colleague? I would advise you, if you go down the NPS route, to include questions regarding age, gender and locations. This will give you not only an overview of what your company is doing right, but also where you need to expand, if you landed on a demographic you are not explicitly catering to then knowing about it is the first step towards leveraging it.

There are so many resources out there on NPS, and I advise you look into them yourself, the designers have their own site, but needless to say they are a little bias in favor of the system. I prefer third party analysis of the system. I do not think you should buy into the marketing behind it, it is not a catch all replacement, and it is not the be all and end all of customer feedback. But I do think you should use it, the data is useful and implementing the system takes a very short time.

Barry W Stanton
Irish born writer who drinks too much caffeine and reads too much Terry Pratchett. I enjoy long walks on the server and Korean cuisine.


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