Net Promoter Score: Calculation and More

NPS measures customer loyalty with one question: "How likely are you to recommend us?" Rated 0-10, respondents are categorized as Promoters (9-10), Passives (7-8), or Detractors (0-6). NPS equals the percentage of Promoters minus Detractors. It's crucial for gauging satisfaction and guiding improvements. Let's understand this in detail!

 

 

Have you ever completed a binge-worthy series on Netflix and then seen a pop-up asking, 'On a scale of 0-10, how likely are you to recommend us to a friend?' Ever wonder what that's about? This is Netflix implementing the Net Promoter Score (NPS) system.

It's a tool used to measure customer satisfaction and loyalty. By rating your likelihood to recommend Netflix, you help them calculate their NPS. This provides insights into how much their viewers enjoy the service and whether they're willing to endorse it to others. This feedback is crucial for Netflix to understand its performance and improve the user experience.

Explore Online Product Management Courses to learn about more essential concepts. 

Table of Content

• What is Net Promoter Score?
• Importance of NPS
• Net Promoter Score Calculation
• What Constitutes a Good NPS Score
• Industry-Specific NPS Benchmarks
• Global NPS Trends and Cultural Differences

What is Net Promoter Score?

In 2003, Fred Reichheld, a partner at Bain & Company, developed the concept of Net Promoter Score. This is based on the single question- "How likely are you to recommend our company/product/service to a friend or colleague?"

Net Promoter Score (NPS) is a metric used by companies to measure customer loyalty and satisfaction. Unlike more complex customer satisfaction metrics, it stands out for its simplicity and direct correlation with business growth. 

It's calculated on a scale of 0-10 by asking customers how likely they are to recommend a product or service to others. Customers are categorized as Promoters, Passives, or Detractors based on their responses. NPS helps businesses gauge overall customer sentiment and identify areas for improvement. This is an essential concept in product management as high NPS often indicates strong product-market fit, reflecting that a product meets customer needs and drives loyalty.

Importance of NPS

Net Promoter Score (NPS) is a vital tool in measuring customer loyalty and satisfaction for several reasons:
Simple and Direct Feedback Mechanism: NPS boils down customer sentiment into a single, straightforward question: "How likely are you to recommend our product/service to a friend or colleague?" This simplicity makes it easy for customers to provide feedback, leading to higher response rates and more reliable data.

Indicator of Customer Loyalty: NPS categorizes customers into Promoters, Passives, and Detractors, offering a clear picture of how many customers are truly loyal (Promoters), indifferent (Passives), or dissatisfied (Detractors). A high number of Promoters typically indicates a strong loyalty base.

Predictive of Business Growth: Research has shown a strong correlation between a company’s NPS and its future growth. High NPS scores often predict increased customer retention, repeat business, and word-of-mouth referrals, all of which are critical growth drivers.

Benchmarks for Comparison: NPS allows businesses to benchmark their performance against competitors and industry standards. Knowing where you stand in your industry helps identify whether customer satisfaction and loyalty are areas of strength or need improvement.

Guides Customer-Centric Improvements: Regularly tracking NPS can highlight trends and shifts in customer attitudes. This ongoing feedback loop is invaluable for businesses in prioritizing customer-centric improvements and making strategic decisions that enhance the overall customer experience.

Net Promoter Score Calculation

Conduct a Survey: Ask your customers the key NPS question: "On a scale of 0-10, how likely are you to recommend our product/service to a friend or colleague?"
Categorize Responses:

Promoters (score 9-10): Loyal enthusiasts who will keep buying and refer others.

Passives (score 7-8): Satisfied but unenthusiastic customers, vulnerable to competitive offerings.

Detractors (score 0-6): Unhappy customers who can damage your brand through negative word-of-mouth.

Calculate the Percentages:

% Promoters: (Number of Promoters / Total Respondents) × 100

% Detractors: (Number of Detractors / Total Respondents) × 100

Compute NPS:

Subtract the percentage of Detractors from the percentage of Promoters.

NPS = % Promoters - % Detractors

What Constitutes a Good NPS Score

A "good" Net Promoter Score (NPS) can vary significantly depending on industry, market conditions, and individual company goals. Understanding what constitutes a good score involves both absolute and relative evaluation methods.

Absolute Evaluation of NPS:

In absolute terms, NPS can range from -100 (every customer is a Detractor) to +100 (every customer is a Promoter). Here's a general guideline:

Below 0: A negative NPS indicates that a business has more Detractors than Promoters, suggesting serious issues with customer satisfaction and loyalty.

0 to 30: A positive score, but with significant room for improvement. This range suggests moderate customer satisfaction.

30 to 70: Generally viewed as a good score, indicating that a company has substantially more Promoters than Detractors.

Above 70: An excellent score, reflecting extremely high customer satisfaction and loyalty. This is often seen in highly customer-centric industries or niche markets.

Relative Evaluation of NPS:

Comparing your NPS with industry benchmarks is crucial for a more meaningful assessment:

Industry Averages: NPS can vary widely by industry. For example, luxury brands might typically have higher NPS scores than utility companies. Knowing the average score in your industry is vital for context.

Competitive Benchmarking: Comparing your score against direct competitors provides insight into your relative position in the market.

Historical Comparison: Tracking changes in your NPS over time helps assess the impact of business decisions and market changes on customer perception.

Regional Variations: Customer expectations and cultural factors can influence NPS, making it important to consider geographical context in multinational businesses.

Industry-Specific NPS Benchmarks

Global NPS Trends and Cultural Differences

Example: Japan vs. the United States

Cultural Response Patterns:

In Japan, customers are known for being more reserved in their feedback. A high NPS in Japan might not involve as many 9s or 10s compared to the United States, where customers are more likely to use the extremes of the scale.

Data Illustration: A company might receive an NPS of +50 in the U.S. but only +30 in Japan, yet in both cases, it can be considered an excellent score respective to the cultural context.

Example: Technology Sector

Economic and Technological Influence:

In regions with rapid technological advancements, like South Korea or Singapore, customers might expect innovative digital solutions, which can influence their NPS responses.

Company Example: Samsung, a South Korean tech giant, must consistently innovate to maintain high NPS scores in a market with high expectations for tech products.

Transactional vs. Relational NPS Programs

Example: Amazon (Transactional NPS)

Transactional NPS:

Amazon, with its focus on e-commerce, might measure NPS after each purchase or customer service interaction.

Data Use: This approach allows Amazon to quickly identify and rectify issues at specific touchpoints, like the checkout process or customer service interactions.

Example: American Express (Relational NPS)

Relational NPS:

American Express might conduct regular NPS surveys to gauge overall customer satisfaction and loyalty over time.

Long-term Focus: This approach is crucial for a financial services company where customer relationships span years, and loyalty is linked to trust and consistent service quality.

Key Insights

Global NPS Considerations:

Companies operating in multiple countries must tailor their interpretation of NPS to account for cultural nuances in feedback.

For instance, a global hotel chain like Marriott would need to interpret NPS scores differently in Asia compared to Europe due to varying cultural expectations in hospitality.

Transactional vs. Relational NPS:

The choice between transactional and relational NPS should be based on the company’s business nature and customer interaction frequency.

For example, a fast-food chain like McDonald's might prioritize transactional NPS to assess customer satisfaction at each visit, while a car manufacturer like Toyota would focus more on relational NPS, reflecting the long-term customer relationship.

Conclusion!

The Net Promoter Score (NPS) is a key metric for assessing customer loyalty and satisfaction. It measures how likely customers are to recommend a company's products or services to others. NPS helps identify promoters, passives, and detractors, providing insights for improving customer experience and driving business growth. A higher NPS indicates stronger customer loyalty and the potential for positive word-of-mouth referrals.