Net Promoter Score

Net Promoter Score (NPS) refers to the metric developed by management consultant Fred Reichheld in 2003 to measure customer loyalty. It can be anything from a low of -100 (all customers are detractors) to a high of 100 (all customers are promoters), which indicates the willingness of customers to recommend a particular product or service to others.

• Management consultant Fred Reichheld developed the Net Promoter Score (NPS) in 2003 to determine customer loyalty. 
• It can be from a low of -100 (all customers are detractors) to a high of 100 (all customers are promoters), showing customers' readiness to favor a specific product or service over others.
• As per Reichheld, the average company in the U.S. scores less than +10, while several best companies may obtain scores of +50 and +80.
• It is crucial since large companies utilize it to determine customer feedback. Moreover, it provides an easy-to-understand figure that managers may employ to obtain customer delight and not just satisfaction. 

• Net Promoter Score (NPS) helps assess the probability of endorsing a particular company or its product and service to colleagues, friends, or relatives.
• The underlying idea is that if customers like a particular product or company, they share their experience with those they know.
• Typically, the customers are surveyed, and they are required to respond to one question, "How likely are you to recommend our company or product or service to a friend or colleague?" and provide a score on an 11-point rating scale, where 0 indicates that they are not at all likely to recommend and 10 suggests that they are extremely reasonable.

Based on the ratings that the customers provide, they are then classified into three broad categories: -

1. Promoters: They are loyal customers who keep buying and recommending to others, fueling growth. These enthusiasts give scores in the range of 9-10.
2. Passives: They are satisfied customers but not very enthusiastic and, as such, are vulnerable to competitive offerings. They give a score in the range of 7-8.
3. Detractors: They are unhappy customers who spread negative word-of-mouth that damages the brand image. They give a score of less than 6.

It is calculated by subtracting the percentage of detractors from the percentage of promoters. Mathematically, it can be represented as: -

Net Promoter Score = Percentage of Promoters – Percentage of Detractors

Although the net promoter score is very popular among business executives, it also has its share of critics from academic and market research circles. Some of the criticisms are as follows: -

• Various researchers claim that "likelihood to recommend" is not the best predictor of customer loyalty. There is no scientific evidence that it perfectly reflects overall customer satisfaction or intent to purchase again.
• Some researchers question the credibility of an 11-point scale to measure customer preference. On the contrary, they claim that a 7-point scale better predicts historical recommendations than an 11-point scale.
• It is believed that a metric calculated based on a response to a single question is much less reliable when compared to a composite index of several questions.

• One can benchmark the Net Promoter Score (NPS) for different areas or products to assess where a particular company stands in the industry regarding the brand image.
• According to Reichheld, the average company in the U.S. scores less than +10, while some of the best companies can achieve scores in the range of +50 and +80.
• However, it is challenging to benchmark the net promoter score as it varies considerably based on sector, culture, etc.

The net promoter score is crucial as most large companies use it to measure customer feedback. It gives an easy-to-understand figure that managers can use to achieve customer delight (not just satisfaction). In addition, some marketers believe that the net promoter's score can be used as a proxy indicator of a company's growth potential.

Some of the significant advantages are as follows: -

• NPS is considered a credible tool by most business managers as it was introduced by one of the leading management consulting firms – Bain & Company.
• Its output is easy to understand and communicate, so one can easily tell what proportion of the customers are extremely satisfied with the product or service.
• Relatively easier to benchmark as most industry players use this popular metric. It can help companies determine their position in the competitive landscape and assess their gap with the established players.
• Some research suggests that the net promoter score strongly correlates with a company's revenue. It could be attributable to the fact that implementing this system helps employees assess the gap and then strive for better customer feedback.

Some of the major disadvantages are as follows: -

• It is very challenging to put a number against different levels of customer loyalty.
• The likelihood to recommend does not guarantee recommendation. For example, a person might give a score of 10 but later would not recommend it.
• Researchers argue over the statistical validity of grouping an 11-point scale into three broad categories. There are debates on what qualifies a score of less than 6 to be classified as a "detractor" and a score of more than 9 to be classified as a "promoter."

So, we can see that although the net promoter score is considered a very useful management tool, it may not be sufficient to draw strong insights. However, if used with the right framework, it can provide valuable input for a company. Its USP is its simplicity, resulting in many companies using this tool regularly.

This article is a guide to the Net Promoter Score and its definition. Here, we discuss how net promoter score is calculated and works, along with its advantages and disadvantages. You may learn more about financing from the following articles: -

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