Net Promoter Score

Net Promoter or Net Promoter Score (NPS) is a management tool that can be
used to gauge the loyalty of a firm's customer relationships. It serves as an
alternative to traditional customer satisfaction research and claims to be
correlated with revenue growth.[1] NPS has been widely adopted with more than
two thirds of Fortune 1000 companies using the metric.[2]

Net Promoter Score is a customer loyalty metric developed by (and a registered

trademark of) Fred Reichheld, Bain & Company, and Satmetrix Systems. It was
introduced by Reichheld in his 2003 Harvard Business Review article "One
Number You Need to Grow".[3] NPS can be as low as 100 (everybody is a
detractor) or as high as +100 (everybody is a promoter). An NPS that is positive
(i.e., higher than zero) is felt to be good, and an NPS of +50 is excellent.

Net Promoter Score (NPS) measures the loyalty that exists between a provider
and a consumer. The provider can be a company, employer or any other entity.
The provider is the entity that is asking the questions on the NPS survey. The
consumer is the customer, employee, or respondent to an NPS survey.
How it works[edit]
The Net Promoter Score is calculated based on responses to a single question:
How likely is it that you would recommend our company/product/service to a
friend or colleague? The scoring for this answer is most often based on a 0 to 10
scale.[4]

Those who respond with a score of 9 to 10 are called Promoters, and are
considered likely to exhibit value-creating behaviors, such as buying more,
remaining customers for longer, and making more positive referrals to other
potential customers. Those who respond with a score of 0 to 6 are labeled
Detractors, and they are believed to be less likely to exhibit the value-creating
behaviors. Responses of 7 and 8 are labeled Passives, and their behavior falls in
the middle of Promoters and Detractors.[4]:51 The Net Promoter Score is
calculated by subtracting the percentage of customers who are Detractors from
the percentage of customers who are Promoters. For purposes of calculating a
Net Promoter Score, Passives count towards the total number of respondents,
thus decreasing the percentage of detractors and promoters and pushing the net
score towards 0.[5]

Companies are encouraged to follow the likelihood to recommend question with

an open-ended request for elaboration, soliciting the reasons for a customer's
rating of that company or product. These reasons can then be provided to front-
line employees and management teams for follow-up action.[3] Local office
branch managers at Charles Schwab Corporation, for example, call back
customers to engage them in a discussion about the feedback they provided
through the NPS survey process, solve problems, and learn more so they can
coach account representatives.[6]

Reichheld and Markey say the rating and answers to the "Why?" question provide
all that is needed to identify reference customers and improvement
opportunities. While this may be the case, the lack of any easy way to
automatically analyze the verbatim answers without human bias is problematic.
The response of many companies to the problem has been to add additional
questions with rating scales.

Additional questions can be included to assist with understanding the perception

of various products, services, and lines of business. These additional questions
help a company rate the relative importance of these other parts of the business
in the overall score. This is especially helpful in targeting resources to address
issues that most impact the NPS. Companies using the Net Promoter System
often rely on software as a service vendors that offer a full suite of metrics,
reporting, and analytics.[4]:4849

The primary purpose of the Net Promoter Score methodology is to evaluate

customer loyalty to a brand or company.[citation needed] The ability to measure
customer loyalty is a more effective methodology to determine the likelihood
that the customer will buy again, talk up the company and resist market pressure
to defect to a competitor.[citation needed] Measuring loyalty can be done in
several ways, and researchers have asserted that there are better predictors of
actual recommendations than asking "likelihood to recommend."[7] Since the
purpose of Net Promoter is not to predict actual recommendations alone, but to
predict the full suite of financially advantageous behaviors, proponents of the
methodology do not find this troublesome.[4]:6572

Net Promoter System also requires a process to close the loop. Closing the loop is
a process by which the provider actively intervenes to learn more from
customers who have provided feedback, and also to change a negative
perception, often converting a Detractor into a Promoter.[4]:175198 In order to
do this, the survey respondent can not be anonymous (something that can have
a negative impact in the willingness to take the survey or to give low grades).
[citation needed] The Net Promoter survey will identify customers who need
some follow-up, including Detractors, and should automatically alert the provider
to contact the consumer and manage the followup and actions from that point.
[8]

Proponents of the Net Promoter approach claim the score can be used to
motivate an organization to become more focused on improving products and
services for consumers.[9] They further claim that a company's Net Promoter
Score correlates with revenue growth.[10] The Net Promoter approach has been
adopted by several companies, including Australia Post,[11] Siemens,[12] E.ON,
[13] Philips,[4]:6165 GE,[14] Apple Retail,[15] American Express,[16] and Intuit.
[17] It has also emerged as a way to measure loyalty for online applications, as
well as social game products.[18]

A customer is able to leave comments in the surveys sent to them. This is what
allows a company to use the VOC (Voice of Customer) to ensure that company is
meeting the expectations.[citation needed]

Some proponents of the Net Promoter Score also suggest that the same
methodology can be used to measure, evaluate and manage employee loyalty.
They claim that collecting the feedback from employees in a manner similar to
Net Promoter customer feedback can provide companies a way to maintain focus
on their culture. What is sometimes called the "employee Net Promoter Score" or
eNPS has been compared to other employee satisfaction metrics and some
companies have claimed that it correlates well with those other metrics.[4]:165

For some kinds of industries, notably software and services, it has been shown
that Detractors tend to remain with a company and Passives leave.[19] This
appears to be the case where switching barriers are relatively high.

In the face of criticisms of the Net Promoter Score, the proponents of the Net
Promoter approach claim that the statistical analyses presented prove only that
the "recommend" question is similar in predictive power to other metrics, but fail
to address the practical benefits of the approach, which are at the heart of the
argument Reichheld put forth. Proponents of the approach also counter that
analyses based on third-party data are inferior to analyses conducted by
companies on their own customer sets, and that the practical benefits of the
approach (short survey, simple concept to communicate, ability to follow up with
customers) outweigh any statistical inferiority of the approach.[17] Interestingly,
they also allow that a survey using any other question can be used within the
Net Promoter System, as long as it meets the criteria of sorting customers
reliably into promoters, passives and detractors.[4]:1213

Criticism of NPS[edit]
While the Net Promoter Score has gained popularity among business executives,
it has also attracted controversy from academic and market research circles.

The lack of a proven causal connection is a feature of all use of statistical

correlation and regression techniques. They suggest where to look for causal
connections but do not provide them on their own.[20]
NPS does not add anything to other loyalty-related questions.
Research by Keiningham, Cooil, Andreassen and Aksoy disputes that the Net
Promoter metric is the best predictor of company growth.[21] Furthermore,
Hayes (2008) claimed there was no scientific evidence that the "likelihood to
recommend" question is a better predictor of business growth than other
customer-loyalty questions (e.g., overall satisfaction, likelihood to purchase
again). Specifically, Hayes stated that the "likelihood to recommend" question
does not measure anything different from other conventional loyalty-related
questions.[22] The customer metrics included in this study perform equally well
in predicting current company performance."[23]

NPS uses a scale of low predictive validity.

Daniel Schneider, Matt Berent, et al. found that out of four scales tested, the 11-
point scale advocated by Reichheld had the lowest predictive validity.[24]

Less accurate than composite index of questions.

"A single item question is much less reliable and more volatile than a composite
index."[25] "Furthermore, combining CFMs (customer feedback metrics), along
with simultaneously investigating multiple dimensions of the customer
relationship, improves predictions even further."[23]

Fails to predict loyalty behaviors.

"Recommend intention alone will not suffice as a single predictor of customers'
future loyalty behaviors. Use of multiple indicators instead of a single predictor
model performs significantly better in predicting customer recommendations and
retention."[26] "given the present state of evidence, it cannot be
recommended to use the NPI as a predictor of growth nor financial
performance."[27]