The ABC of Netpromoter®

The ABC of Netpromoter®

Thursday, January 31, 2013

Netpromoter® or Net Promoter® System (or Score), more commonly termed as NPS® is becoming a household name in the corporate world. While the world-class companies have adopted NPS as a key initiative to transform their organization to get closer to their customers, more companies are jumping the bandwagon to get the taste of the benefits in embracing the system.

Netpromoter was first introduced by Fred Reichheld, a partner in Bain & Co in 2003 through a paper titled “The one number you need to grow” in Harvard Business Review. Fred has been working on loyalty domain for many years before he wrote this paper.  One of his major issues (and every other loyalty practitioner) with loyalty and the associated metrics was that there is no strong link between loyalty and the financial performance of a company. While intrinsically, leaders of companies know that loyal customers is key ingredient for sustainability and growth, they usually struggled with metrics that can strongly correlate with profit, revenue or market share. 

Fred, in search of a metrics that will highly correlate with financial metrics went on a study with Satmetrix Inc during 2003. The team analyzed some 4,000 customers from six industries to determine the loyalty questions that lead to re-purchase and referral. They analyzed with eight commonly used loyalty questions with a hypothesis of getting different loyalty questions for each industry.

The finding was stunning! They found one loyalty question seems to explain 80% of the customers’ behaviour of re-purchase and referral. The question was “Likelihood to Recommend”. 

Asking “Likelihood to Recommend” to a customer touches both domain of customer’s behaviour ie. logic and emotion. By recommending a product or a service, one is not only truly satisfied with that encounter, but also putting his or her reputation at stake. You tend to recommend only to another person when you have personally experienced a good product or service.

So yes, Net Promoter Score is all about this one question – “On a scale of 0 to 10, how likely is it that you would recommend a company, product or service to a friend or family?” The question may ‘cosmetically’ vary but the core principle of recommend remains. Customers could be sorted into three distinct categories based on the result of this question. Customers giving a score of 9 or 10 are called Promoters who simply love your company or service or product you provide; customers who score of 7 or 8 are Passives who are satisfied but not enthusiastic about you; while customers giving 0 to 6 are Detractors who are truly un-happy with you. Net Promoter Score is % Promoters minus % Detractors. Hence NPS range would be from -100 to 100 which denotes all Detractors to all Promoters respectively. Obviously, like any other metrics, NPS could be measured by a specific timeline or by a cluster of customers such as by customer demography, product, location etc.

Research has shown that Loyalty leaders tend to grow more than 2x than an average company in an industry. This is no surprise because the outnumbered promoters of these Loyalty leaders tend to buy more, stay longer, refer to their friends and family, and provide constructive feedback in growing the company. Implementing NPS is not all about $$$. It is a business equivalent of the Golden Rule – treat others the way you want to be treated. Companies that grow more promoters are those that systematically find ways to eliminate ‘bad profits’ which are profits made out of confusing customers with un-ethical charges. 

While the measurement looks simple enough for anyone with basic mathematics to calculate the NPS, the idea is not just about measuring the score. The success of this (or any) metrics in helping a company depends on many things. A company wanting to implement NPS must first clearly understand how the metrics can help in increasing loyalty and growth, why it is important to measure and categorize customers, where the data of the score came from, who is behind each of the score (ie. which customer), what to do to improve the score. Addressing these questions shifts a company from Net Promoter Score to Net Promoter System.

Satya Narayanan