What is Net Promoter Score (NPS)?
Net promoter score (NPS), also known as net promoter, is a metric that assesses the willingness of customers to recommend a company’s products or services to other people. Essentially, the net promoter score can be viewed as an indicator of customer loyalty and satisfaction. The metric aims to identify customers who are less satisfied with the customer experience or product and transform them into the company’s promoters.
How to Calculate Net Promoter Score?
The net promoter score’s calculation is based on a customer survey. The survey asks only one question: “On a scale from 0 to 10, how likely would you recommend our product/service to other people?”
Based on their responses, all respondents are broken down in three categories:
- Detractors: Unhappy customers who can spread negative reviews of a company.
- Passive: Satisfied but unenthusiastic customers who can be taken by competitors.
- Promoters: Loyal customers who can spread positive reviews of a company.
Net promoter score is determined as the percentage difference between promoters and detractors:
Net Promoter Score = Promoters (%) – Detractors (%)
Importance of NPS
A high NPS is generally associated with healthier and more successful businesses. For example, research conducted by Bain & Co. revealed that there is a correlation between net promoter score and organic growth measures. The study determined that industry leaders with the highest NPS tend to experience organic growth that is two times higher than other companies. However, the relationship works mostly in mature industries with a large number of players.
In addition, a high NPS allows a company to accelerate its success. The reason is that such companies can save a substantial amount of money on marketing activities and invest the funds into other areas of business that can help to accelerate further growth. However, this is not always the case. The relationship between organic growth and net promoter score may vary among industries and companies.
How to Increase NPS?
In order for a company to increase its NPS, it must develop an organizational system that concentrates on making constant improvements to customers’ experience.
Generally, it is recommended to create cross-functional teams of employees from marketing, sales, and customer service departments to ensure that the departments adhere to a common goal to improve the company’s NPS.
In addition, a company must create a system in which feedback from customers is received as quickly as possible and the feedback is used to improve the customers’ experience.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: