What you don’t know about NPS: A source of competitive advantage

 

Originally published in Marketing

 

 

 

While marketing metrics do not seem to get enough credit from top-level management, the Net Promotor Score (NPS) has been given far less credit than it deserves; even by marketers themselves. The NPS is a marketing metric developed in 2003 by Frederick F. Reichheld to measure behavioural loyalty, provide insights to grow in competitive markets, and help widening profit margins. It is a conceptually-sound metric which has the potential to revive a dying business and be a source of a sustainable competitive advantage. Additionally, the NPS has a number of advantages over other marketing metrics such as customer-satisfaction including:

  • strong correlation with business growth and profitability in most industries;
  • simplicity;
  • quick implementation;
  • easy to interpret;
  • easy to communicate; and
  • most importantly, less expensive.

Yet, according to the Big Issues in Retail Survey 2015-16, marketing practitioners perceive the NPS as the least important among nine other marketing metrics. Figure 1 presents the perceived importance of nine marketing metrics; customer satisfaction metrics are ranked the most important marketing metrics while NPS is ranked the least. This finding should not be ignored! The overwhelming majority of marketing practitioners appear to overinvest in customer-satisfaction metrics (which are costly, time-consuming, and inconsistent in demonstrating connections to consumer behaviour and growth) while underestimating the power of NPS (Heichheld, 2003).

Further analysis of the Big Issues in Retail Survey 2015-16 revealed that large businesses recognise the benefits of using NPS more than smaller businesses do. Figure 2 shows that although the NPS metric is generally perceived to be of lower importance, large businesses consider it more important than medium-size and small businesses do. Foodstuffs is one example of a large business that uses the NPS metric and shares its score with stakeholders and the media on a regular basis (Euromonitor International). Whereas large businesses seem to be taking advantage of the NPS metric, smaller businesses (which need to grow!) are wasting resources on customer-satisfaction metrics.

 

Is it possible that survey respondents had goals other than business growth so that they perceive it as the least important? The likely answer is no; it is hard to think that the vast majority of practitioners surveyed were not interested in growing their brands/companies. However, it is possible that practitioners do not know about, or fully understand, the concept of NPS. Therefore, this article simplifies and summarises Reichheld’s (2003) paper, in which the NPS metric was introduced and explained, for practitioners with different educational backgrounds. The summary will then be followed by a description of the application process of NPS and a conclusion.

Summarising Reichheld’s (2003) Paper

Conceptual Background

The concept of NPS is that business growth and profitability are driven by behavioural loyalty and, therefore, should be measured using behavioural indicators instead of attitudinal indicators. Reichheld and his colleague (2003) found that recommending something to a friend or colleague is a strong indicator of customer loyalty in most industries. They asked 4,000 customers several questions including whether they would recommend a product to other people. Customers’ responses were then matched with their actual repurchasing and referring behaviours recorded in the subsequent 6-12 months. The recommendation question matched respondents’ actual behaviours in most industries far more than other questions did.

The strong link between recommending a product and rebuying it is justified by that, when recommending a product, customers put their reputation under social judgement and take the risk of destroying it. Customers, willing to sacrifice their reputation/credibility, are far more likely to refer and repurchase than other customers. Those behaviourally-loyal customers are the source of business growth and profitability. On the other end of the spectrum are customers who are willing to sacrifice something (time, money, reputation …etc.) to devalue a brand/product/store. Those customers would also put their reputation under social judgement by not recommending your store/product/brand at all.

The NPS Concept

To draw lines and figure out who is who, Reichheld’s (2003) used an 11-point scale with 0 being Not At All Likely, 5 being Neutral, and 10 being Extremely Likely (see Figure 3 below). He assessed responses to the recommendation question with respect to customer repurchase and referral behaviours. His assessment resulted in finding three distinct groups of customers labelled Promotors, Passively Satisfied, and Detractors.

Promotors are the most enthusiastic customers who have the highest rates of repurchase and referrals. This group of loyal customers is the source of business growth and profitability; thus, the goal is to have more Promotors. As Figure 3 shows, the Promotors group scores 9-10 on the scale. The Passively Satisfied are indifferent, opportunity-driven and open to switch to competitors at any time and for any reason. Customers in this group are sceptical of marketing activities and hard to predict; these customers score 7-8 on the scale. Finally, Detractors are disappointed customers who can do serious damage to your product/brand through sharing their negative experiences with friends, family, colleagues, and other potential prospects. The Detractors group is an important group because these customers have unfulfilled needs and a lot to say and share (feedback). This group is, in fact, a valuable source of business development as it tells you where the problems are and energises the company to move forward. Detractors score 0-6 on the scale.

The NPS is the percentage difference between Promotors and Detractors. A positive NPS indicates that the number of current customers repurchasing and referring your products (Promotors) is greater than the number of disappointed customers spreading negative word-of-mouth (Detractors). A negative NPS means there are more Detractors than Promotors. NPS is 100% when all your customers are Promotors while it is -100% when all of them are Detractors. As illustrated in Figure 4, the higher the NPS, the more growth your company is experiencing. Do not be shocked, however, if you find your company having a low NPS; the median NPS of 400 companies in 28 industries is 16% (Reichheld, 2003).

Managerial Implications

The NPS metric has been proved effective in most industries regardless of the business model and/or size. It works effectively as long as the customer has a choice. Differently put, NPS will not work in completely or partially monopolistic markets in which customers have no choice. Moreover, the NPS metric may not be as effective when the relationship with the customer is contractual. Other than that, it is the metric to use “if growth is what you’re after” (Heichheld, 2003, p.1).

Marketing managers and practitioners should focus on increasing NPS though 1) retaining existing Promotors; and 2) converting Detractors into Promotors. One way to achieve this is to learn from the differences and relationships between groups as well as best practices that can be shared/reinforced throughout the organisation. In practice, the groups are compared against other geographic, demographic, behavioural, and/or attitudinal variables. This is to learn what makes Detractors disappointed and what is making Promotors loyal.  Once differences, relationships, and best practices are identified and shared throughout the organisation, top-level management develops a strategy/policy to reinforce these changes. Everyone in the organisation should be aware of what has changed/improved. Such a strategy should be transparent, well-communicated, and be easily understood by frontline employees (Heichheld, 2003).

Hopefully, the Summary section above made you interested in applying the NPS metric.

Application

The process of applying the NPS is straightforward as shown in Figure 5. It starts by asking your customers whether they would recommend your product/website/store to their friends and colleagues. There are a number of methods to collect these data including emails, online/offline surveys, social media, and pop-up windows on your website. Chances are you collect these data already! Once you collect enough data and have a sufficient sample, you move the next step.

The second step is the analysis step in which the NPS is calculated and analysed for further insights. Analysts may use software like Excel, SPSS, and/or SAS to calculate and analyse NPS. This step could be an uncomfortable step for practitioners with little or no background in statistics/analytics. If you are one of those, you will find this Step-by-Step Guide to Calculating & Analysing NPS Using Excel useful.

The last step is Act. At this step, you are going to use the information you found in the previous step to make informed decisions. The goal is to use the knowledge you gained to increase NPS. This is a very important step which requires transparency, good understanding of what needs to be changed/improved, and good two-way communications with others within the organisation.

Conclusion

If your goal is to grow your company/business, then think twice before using marketing metrics such as customer satisfaction. To accomplish your goal, you need a metric that correlates consistently and strongly with business growth. The NPS metric does not only meet this need but also is simple, timely, easy to interpret, easy to communicate, and less expensive. To me, these reasons are good enough to make the NPS metric far more important to practitioners than it is now. Do you agree?