Measuring Customer Loyalty Using the Net Promoter Score
The Net Promoter Score (NPS) is a measure of customer loyalty that allows companies to benchmark their performance relative to other organizations within and outside their industry. The primary purpose of NPS is to evaluate customer loyalty, not their satisfaction with a particular product, brand, or service. By measuring NPS over time, companies can track how their performance is affected by internal or external changes. NPS is based on a fundamental understanding that every group of customers can be divided into three categories: Promoters, Passives, and Detractors.
- Promoters are loyal enthusiasts of a company or brand who will continue buying and refer others. These customers will fuel a company’s growth.
- Passives are satisfied customers, but unenthusiastic and are vulnerable to competitive offerings.
- Detractors are unhappy customers who can damage a brand and can impede growth through negative word of mouth.
Calculating Net Promoter Score
The NPS is derived from the simple question “How likely are you to recommend [company, product, or service] to friends, family, and colleagues?” from which customers can respond on a scale of 0 to 10 with “0” being “Not at all likely” an “10” being “Very Likely”.
The NPS is calculated as such: % of Promoters - % of Detractors = NPS. The NPS can be as low as -100 where every customer is a detractor, or as high as +100 where every customer is a promoter.
According to Satmetrix, the company that developed the NPS in conjunction with other companies, the top NPS leaders in the United States are Princeton Mortgage (98), Tesla (97), Nutanix (92), Loanboox (90), Nimble (85), Metro Bank (82), T-Mobile (82), Warby (80), Allianz (79) and Starbucks (77). Companies that have an NPS between 50 and 80 tend to have the most efficient growth. However, while a score of say 36 may not seem great the score must be considered in the context of the competitive set. If competitors have NPS of 10, a score of 36 would be high in the industry.
Many companies are in a situation in which their Promoters barely outnumber their Detractors and thus their NPS is very low. The NPS of some companies is negative as they are creating more Detractors than Promoters.
Digging Deeper into the Net Promoter Score
The primary utility of NPS lies in what it measures, the percentage of customers who are enthusiastic enough to refer the company, as this is perhaps the strongest sign of customer loyalty. As useful as NPS is, it does not answer all questions on its own. For example, the value of knowing whether someone is likely or unlikely to recommend is limited unless you also know why they feel that way.
To understand why customers feel the way they do, it is extremely beneficial to follow with a few qualitative questions. Asking “What are the reasons you rated the company / brand as a ____ (insert rating)?” and “What could the company / brand do to turn your rating into a 10?” can provide valuable insight on how to improve the NPS. Additionally, asking customers for their rating initially, then providing a brand concept statement or statements, and asking them to rate again can lead to insights about what factors can cause a customer to raise their rating. Most researchers do not measure NPS in insolation. Instead, they combine other loyalty and satisfaction measures, reasons for behaviors and attitudes, and the NPS to provide insight into why people think and behave the way they do.
Understanding what a brand, product or service can do to improve customer loyalty should be one of the main priorities of all companies looking to advance their market share. Among the methodologies available, NPS provides a simple yet powerful measure that can be implemented with relative ease.
Q2 Insights is a marketing research consulting firm located in San Diego. Q2 Insights can be reached at (760) 230-2950 ext. 1 or at info@q2insights.com.
