Have you ever asked your family and friends questions like ‘From 1-10, how much do you like this gadget/ product etc. and would you recommend it?’
If yes, you have been successfully utilizing the concept of Net Promoter Score in your day-to-day life to study reactions, preferences and satisfaction levels of other individuals.
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What is the Net Promoter Score and Why is it Used in Marketing?
The Net Promoter Score, commonly known as NPS, is a metric system that is used to gauge customer satisfaction, customer experience and engagement levels. It basically evaluates sentiments to assess whether or not a customer will recommend a particular brand.
It is a simple Question and Answer system wherein the brand asks its customers to rate how likely they are to recommend the brand to others on a scale of 1-10 with 10 being ‘very likely’ and 1 being ‘unlikely’. Based on the ratings, the customers are segmented into three categories. Customers that rate between 0-6 are Detractors, 7-8 are Passives and customers that rate between 9-10 fall under Promoters. The customers of each category or segment have specific attributes according to research by Fred Reichheld of Bain & Co. with Satmetrix. Detractors are basically unhappy customers who are not satisfied with your brand as a whole and are unlikely to purchase from you again. The Passives are moderately satisfied with your brand but are not thoroughly impressed. They may repurchase from your brand but it is unlikely that they might recommend you. Lastly, Promoters are extremely satisfied customers who have a high probability of turning into brand loyalists and advocates.
The NPS is calculated by subtracting the Detractors from the percentage of Promoters. Generally, NPS of 40 and above is considered as a benchmark for high-performing brands with strong customer loyalty.
The Origin Story
Contrary to popular belief, it was not in 2003 but in 1993 when the NPS system was introduced by Fred Reichheld, in 2003 that the system was adopted by Bain & Co. and Satmetrix and published in Harvard Business Review. The team at Bain & Co. with the support of data supplied by Satmertrix launched a project wherein 20 distinct questionnaires were sent out to at least a thousand customers from six different sectors and industries.
The researchers noted that one question, in particular, had a direct correlation with purchase as well referral patterns of consumers and that it had a significant impact on customer loyalty as well. The question was based on the likelihood of a recommendation. The research as well as the NPS system gained popularity and was adopted by companies and brands across various sectors to measure customer satisfaction and loyalty for years to come.
Endorsed by a well-known consulting firm, Bain & Co., the NPS system gained traction rapidly and became a well-recognized and universally accepted metric to gauge satisfaction levels. During the first phase of its launch, the NPS score was regarded as a strong and accurate metric to measure business growth.
The simpler the concept, the higher the efficiency. NPS system adopted this formula to speak a language that is universally accepted and is comprehensible to a common customer. Since the concept is understood by everyone and hardly takes a few seconds of the customer, the participation rate is also higher. The simplicity of the concept also makes it quite appealing to the customers. Moreover, it is easier to calculate as well set up, be it on offline or online channels. Lastly, NPS system can be utilized to track the performance of various activities be it customer experience, customer support, engagement, or even performance of a product or service.
Why Net Promoter Score Is Not the Best Metric to Monitor Growth
- Since 2003, numerous research and studies on human psychology and customer behavior have proved that customer loyalty is a complex subject and that it is determined by various internal and external factors, causes and consequences. A simple question cannot adequately gauge customer loyalty.
- Opponents of the NPS system also believe that the scores are influenced by attitudinal changes such as cultural influence, personality and not facts.
- A study by the University of Cambridge- The Fallacy of the Net Promoter Score: Customer Loyalty Predictive Model also pointed out that NPS cannot be considered a standard industry index to measure a company’s growth. The study states that Keiningham et al. (2007) replicated the analysis used in net promoter research and compared the findings of Reichheld and Satmetrix with the American Customer Satisfaction Index using the same industries employed in Reichheld’s study. Their research rejects the claim that the NPS is the single most reliable indicator of a company’s ability to grow. This fact is also backed by Birgitte Leisen Pollack from The Department of Marketing and Supply Chain Management, University of Wisconsin, who in her 2013 article concluded that given the present state of evidence, it cannot be recommended to use the NPS as a predictor of growth nor financial performance.
- One of the biggest limitations of the system is that it generalizes customer behavior. It is very likely that a Promoter who scores 10 on the index might actually never recommend the brand to anyone. Or a Passive, who rates the brand a solid 7 solely because of cultural influence, might be quite vocal about his preference and recommend the brand to his network.
- The NPS also lacks precision when segmenting customers. For example, a Detractor that rates 0 and a Detractor that rates 6, both are segmented into the same category, despite the evident difference of range of unlikelihood in both the customers. A 2019 article by Harvard Business Review -Where Net Promoter Score Goes Wrong, HBR retracted its stance and shared finding of their survey, the article states that, “Our survey revealed that 52% of all people who actively discouraged others from using a brand had also actively recommended it. And across the NPS scale, we found consumers who had both actively promoted and actively criticized the same brand.”
- Another drawback is that the system doesn’t take non-customers into account, which make up a vast majority of Detractors.
- The NPS system may help you to identity Detractors but won’t show you the precise reason behind the detraction rate. Even the official website offers vague and limited advice on ‘How to improve your score?’
- Lastly, NPS may be a viable option for small-scale businesses but for larger enterprises, it may prove highly inefficient. Rodger Gallagher, MD of Customer Value Management NZ Ltd states that “NPS is ideal for very small retail businesses. With a few other questions added to give some guidance on ‘the why and how to improve’, NPS provides useful information on a low budget. This type of business does not need to systematically improve processes. For larger organizations in a business-to-consumer market, we are able to build econometric models from the drivers of value right through to NPS. One question like NPS doesn’t provide the rigor and information demanded by large clients.”
What Should You Be Measuring Instead?
Although far from accurate, the NPS system can still be used today. However, it must be used in combination with other techniques, methods, and data analysis.
The Recency, Frequency, and Monetary value (RFM) that helps in translating customer data into profitability scores can help in segmenting customers. RFM categorizes customers based on their purchase patterns and behavior. Customer loyalty can also be measured through word-of-mouth equity, an index of a brand’s power to entice customers to influence other potential customers.
Perhaps one of the easiest and highly systematic ways to measure business growth and customer loyalty is by calculating the customer churn rate and customer retention rate. You could also accumulate and analyze social data such as reviews and feedback to gain precise insights into your audience and their affinity towards the brand.
Platforms like Annex Cloud can help you maneuver and sort through data through social and behavioral loyalty solutions. It can also identify the exact number of Promoters and gauge their impact on your brand as well. This data not only give you insights into your business growth and customer loyalty but also help you design better strategies for maximum engagement. To know more, connect with Team Annex Cloud