What is NPS: How to Calculate and Improve Your Score
Have you ever eaten at a restaurant that was so good you just had to tell someone about it? Or maybe you’ve been on the other end and a friend won’t stop nagging you to watch some show on Netflix they swear will change your life. In both of these cases, what you’re experiencing is the power of organic promotion and, like your friend’s TV recommendations, it can be a very persistent force.
Unfortunately promotion is a double-edged sword; bad news can spread even faster than good news. The important thing to understand is that whether it’s good experiences or bad ones, this urge to share isn’t limited to just restaurants and movies – it has implications for all customers and the brands they interact with.
That’s what makes understanding this phenomenon so important. What we understand we can measure and what we can measure we can manage. Lucky for us there’s a tool that helps us do just that, and it’s called the Net Promoter Score (NPS for short).
What is the Net Promoter Score
The Net Promoter Score is a strong leading indicator of brand health because it assesses the strength and direction of the feelings your customers have about your brand. At the heart of the NPS calculation is the simple question:
The responses your customers provide will place them somewhere along the scale from 0 to 10. For more actionable insights consider asking customers to explain why they responded the way they did.
This allows you to segment your customers based on the behaviours their responses are correlated with.
Promoters are the customers that respond with either 9 or 10. They are happy and loyal customers just waiting to sing your brand’s praises. Your products are working for them and these brand advocates can’t wait to let the world know about it. The more promoters a brand has, the better its Net Promoter Score and the more it will benefit from word of mouth marketing. Brands should strive to have as many customers as possible identify as promoters and later in this post we’ll discuss how to move more of your customers into this range.
Customers with responses in the 7-8 range are what we call passives (this may be adjusted depending on which culture is being surveyed). These customers are satisfied but uninspired which is why using customer satisfaction as a metric doesn’t paint a complete picture. There’s nothing necessarily wrong with your brand in their eyes but there’s nothing to talk about either. Passive customers may engage in repeat purchases but they are unlikely to do so at a rate that matches promoters. The goal for passive customers is to attempt to move them to promoter status while protecting them from becoming detractors.
The last customer group is the detractors. Detractors are customers that respond with a 6 or lower. Detractors are high risk customers whose responses indicate they are unhappy and unsatisfied with what your brand is offering. Detractors are concerning because they are very susceptible to substitutes or competitors (much more so than passives). Detractors also pose a threat to your marketing efforts because these are the customers most likely to engage in negative word of mouth campaigns which spread harmful messages about your brand.
How Do You Calculate NPS?
Now that we have divided our customers, we’re ready to actually calculate the Net Promoter Score. The NPS calculation takes the percentage of your customers that are promoters and subtracts the percentage that are detractors to provide a “net” measure of the promotion your customers are likely to engage in about your brand.
If you conduct an NPS survey yourself the following version of the formula may be more intuitive for obtaining your Net Promoter Score.
The logic at work in the NPS formula is that each negative message spread by a detractor essentially cancels out a positive message shared by a promoter. By subtracting the number of detractors from the promoters, a brand can estimate the amount of outgoing positive sentiment about their products. The Net Promoter Score can range from -100% to 100% (in extreme cases) and can hit every number in between. For example, if your brand has an equal number of promoters and detractors your NPS would actually be 0%, (net neutral) as every promoter would be cancelled out by a detractor.
You might be thinking that the NPS calculation leaves room for inconsistency because not every customer who responds with a 6 or lower to the promoter survey will be a detractor. While this may be true, remember that human beings possess a very strong negativity bias. This means that we regard and remember negative information up to twice as much more than positive information of the same intensity.
What this means for the NPS calculation is that if even half of the customers that responded with a 6 or lower turn out to be detractors, the formula isn’t overestimating the impact of the negative message. The Net Promoter Score isn’t perfect, but it is an industry standard calculation for understanding how your customers feel about your brand and the impact those feelings have on your reputation.
What Metrics Does NPS Influence?
Calculating your Net Promoter Score is just the first step. To be able to drive success from your brand based on your NPS you’ll need to understand what other metrics your NPS affects and what you can do to increase your score.
The most important of these metrics are your Churn Rate, Retention Rate, Purchase Frequency and Customer Lifetime Value. Since we’ve discussed these value driving metrics and how to improve them in the past, I’m only going to touch on each of them briefly.
How NPS Influences Churn and Retention Rates
A Net Promoter Score is a leading indicator of churn and retention. By measuring your NPS at regular intervals, you can actually predict what will happen with your churn and retention rates in subsequent periods.
To provide a refresher, your customer churn rate measures the amount of customers that leave or switch away from your product in a given period. Churn costs businesses by removing the customers that are the source of their revenue and forcing brands to incur expensive acquisition in order to replace them. Retention rate, on the other hand, is the inverse of churn and reports how many customers a brand is able to keep over a period. These loyal customers can be up to five times more profitable than a first time customer.
NPS can predict churn by identifying at-risk customer groups before they abandon your brand. A declining NPS is an indicator your churn rate will increase in the near future unless you take corrective action. Customers in the detractor segments are churn risks waiting to happen as their low willingness to recommend your brand is indicative of how they perceive the quality of your service. If this is not addressed those customers will eventually leave your brand and, in doing so, will contribute to your churn rate. Monitoring your NPS will allow you to catch and correct customer churn before it impacts your bottom line.
In the same way, awareness of your Net Promoter Score can help to manage your retention rate. Promoters are loyal customers who are thrilled with their experience and want to talk about it. Their commitment to your brand clearly demonstrates what your retention rate stands to gain from high NPS scores. If your NPS is increasing, you are very likely to see a correlated increase in your retention rate as those valuable customers chase their positive experiences through future interactions with your brand.
How NPS Influences Purchase Frequency and Customer Lifetime Value
As the saying goes, customers “put their money where their mouth is” so if your customers are promoting you, they’re going to be shopping with you as well. The Increased retention and decreased churn that comes with a higher NPS gives rise to the other two related metrics NPS influences strongly: Purchase Frequency and CLV.
Purchase frequency measures the rate at which customers return to your store and can be used to calculate a variety of customer-centric metrics. CLV is the holy grail of customer metrics and allows a brand to estimate a dollar value that each customer will return to the business over the entire time they are a customer. Raising both of these metrics allows a brand to drive more value out of each and every customer they acquire by encouraging customers to purchase more frequently and to remain a customer for longer periods of time.
NPS can estimate purchase frequency and CLV by tracking the percentage of your customer base that identifies as a promoter. The psychological profile of a promoter fits with that of a high value purchaser. When a brand exceeds expectations in a way that makes customers want to recommend that brand to others, that customer is also more likely to come back more often and for a longer duration themselves. Think about it this way: the easiest person for a promoter to influence is themself and when they do, that drives purchase frequency and CLV.
How Can You Improve Your NPS?
Exceeding Customer Expectations Inspires Promoters
When we segmented our customer groups earlier, we described passive customers as satisfied but uninspired. It is this lack of inspiration that’s holding them back from being a top tier promoter. The question then is: how do we inspire our customers? Simple. Give them something to talk about.
Today’s brands are so focused on making sure they are meeting customer expectations that sometimes they seem to forget that just meeting expectations isn’t the goal. Delight and joy are what truly engender positive customer action- not just simple satisfaction. Think about this on a personal level. If you had a pretty average day and a loved one asked you how your day was, you’d probably shrug your shoulders and respond with something like “pretty good”. Contrast this to a great day when things just couldn’t stop going your way. On days like this, we burst in the door and launch into a “You’ve got to hear about my day…”. We don’t even need to be asked!
When brands delight their customers they are giving their passives and promoters fuel for positive word of mouth campaigns. Investing in exceeding your customer’s expectations could have some of them rushing home to explain just how awesome your product is. Whenever possible you should endeavour to move past just satisfying your customers and truly delight them. Your NPS will thank you.
Rewarding Customers for Sharing Enables Promoters
Exceeding expectations gives customers a reason to spread a positive message about your brand but rewarding them for sharing lets them know exactly how to get that message out there. Customers chase positive experiences so if you want to encourage promoters, sometimes you have to put your money where your mouth is (or in this case put your rewards where your mouth is).
Rewards programs are at the heart of a strong retention marketing strategy and they can be used to incentivize all sorts of profitable actions. Where NPS is concerned, rewards can be the factor that pushes a passive customer over the edge and into promotion. Rewards programs also allow a brand to incentivize social sharing via network based services like Facebook and Instagram or encourage more direct promotion through a referral reward.
These rewards show customers exactly how to spread the word about your brand and gives them a little “thank you” from you in return. When you’ve put in the effort to delight your customers, it makes perfect sense to give them a reason and a way to show their appreciation.
Net Promoter Score is an Idea Worth Sharing
Whether it’s a movie your friend tells you that “you just have to see” or a product that’s so good you wish the whole world could try it, the effect of promotion is all around us. Brands that measure and manage their Net Promoter Score will reap the benefits of more profitable purchases and richer customer relationships. Who knows? Maybe increasing your Net Promoter Score is what it takes to land you a promotion of your own.