Net Promoter Score
The Net Promoter Score, or NPS®, is based on the premises every business’s customer can be divided into three categories: Promoters, Passives, and Detractors.
By asking one simple, yet vital question that allows you to track promoters and detractors amongst your customers, clients or patients.
The question is: “How likely is it that you would recommend our business to a friend or colleague?”
You can track these answers on a scale of 0 to 10 and receive a clear measure of your business’s performance through your customers’ eyes.
An analysis by Bain & Co shows that businesses who have an ability to create a sustained value (Business who create long-term profitable growth) have NPS Scores two times higher than the average business. It goes on to say the leaders in the NPS on average grow at more than twice the rate of competitors.
Customers respond on a 0-to-10-point rating scale and are categorised as follows:
The first are Promoters
- (score 9-10) are loyal, enthusiastic supporters of your business who will keep buying and refer others, fuelling growth. They sing the business’s praises to friends and colleagues. They are far more likely than others to remain customers and to increase their purchases over time. Moreover, they account for more than 80% of referrals in most businesses. They are, in general, pleasant for employees to deal with.
The second are Passives
- (score 7-8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings. They are “passively satisfied” because this group is satisfied—for now. Their repurchase and referral rates are as much as 50% lower than those of promoters. Their referrals are likely to be qualified and less enthusiastic. Most telling: If a competitor’s ad catches their eye, they may defect.
And finally, there are the Detractors
- (score 0-6) are unhappy customers who can damage your brand and impede growth through negative word-of-mouth. They are unhappy customers. They account for more than 80% of negative word of mouth. They have high rates of churn and defection. Some may appear profitable from an accounting standpoint, but their criticisms and bad attitudes diminish a company’s reputation, discourage new customers and demotivate employees.
To calculate your company’s NPS, take the percentage of customers who are Promoters and subtract the percentage who are Detractors.
Measuring your NPS gives you a number you can compile and track regularly, not only for a whole business but also for each sector, product, store or customer-service team. You can also track it for customer segments, geographic units or functional groups. It helps everyone focus on the twin goals of creating more promoters and fewer detractors. It is, quite simply, your customer balance sheet.
How the scoring works
The answers to the ultimate question are recorded on a simple zero-to-ten scale. This scale is familiar and easy for customers to understand.
First, it avoids people mixing up the ends of the scale by erroneously selecting “one” on a one-to-ten scale (a zero is never a good score). Second, it provides enough choice, so respondents don’t default to a score of “five out of five” for satisfactory experiences.
With the 11-point scale, the actual behavioural differences from those who score nines and tens versus those who score zeroes and sixes. These behavioural differences are linked to economic value, and that is where the value of your business will be found.
The NPS is a proprietary instrument developed by Fred Reichheld, who owns the registered NPS trademark in conjunction with Bain & Company and Satmetrix. Its popularity and broad use have been attributed to its simplicity and transparent methodology of use.
Predicting customer loyalty
The objective of the NPS system is to predict customer loyalty. This is found where customers continue to purchase and refer your products or service to others.
The NPS can be used on its own. It can also be used with revenue retention rates and customer retention rates. On their own, these may offer valuable customer insights and may offer a better predictability of customer loyalty rates.
The NPS has gained popularity in recent years, especially in the USA. It has also generated controversy in academic and market research circles. Others have questioned whether the NPS is at all a reliable predictor of company growth.
So, what is the point of an NPS?
When you are building a business to a position where it can be sold, a buyer will be interested in your customers. Where you have some form of genuine customer feedback, whether an NPS or other system can be debated.
Take a situation where there is a lack of evidence of feedback from customers and your revenue had been declining. What do you say to a buyer? Where there is evidence and you can demonstrate you have improved retention rates, the evidence will add providence to your business and so, make you stand out from other business your buyer may be looking at.
I know I am tired of always being asked for feedback. Each sales process has its unique features. If some form of feedback, however informal is better than nothing.
I have taken some of the notes for this blog from Wikipedia. More details can be found in more detail by way of a simple search on Google.
Using the Net Promoter Score is just one of the ways you can add value to your business. There are other ways to do this and to find out more go to “How do I maximise the value of a business” here on the website.
There is also a page What makes a business more sellable which you may also find of interest.
More reading, help and advice from Assynt Corporate Finance
Below you'll find links to other articles that offer help and advice about selling your business, what to look for, considerations and recommendations.
If you would like further help, contact us, we'd be only to happy to discuss your sale and can help if we can.