Fifty shades of the NPS part 1: The origins and how it works
Some regard it as an unreliable relic of the past. For others, it is an essential tool used in the support department. Regardless of which group you belong to, NPS is one of the most important, if not the most important, indicators used by many companies, both small and Fortune 500. In this article and the next one, I will tell you more about NPS, where it comes from, how it works and its advantages and disadvantages. I invite you to read on!
How it started
The origins of NPS can be traced back to 2001. Frederick F. Reichheld, in collaboration with Satmetrix, which provided the software and data for the real-time analysis of customer feedback (and on whose board of directors he sat), and the consulting firm Bain & Company, which supported the project by, among other things, participating in the creation of the questionnaires, began researching customer satisfaction, satisfaction and loyalty. The research aimed to simplify the entire process as much as possible to achieve tangible and measurable benefits. A wide variety of questions were tested in the process, but the team was looking for the one question that would be the best measure of customer value.
It may sound breakneck, but it turned out that there was one question that worked best in developed companies, and that was:
How likely are you to recommend company X to a friend or colleague?
A simple, pertinent and elegant question that is still the foundation on which most customer satisfaction teams stand today.
11 out of 14 case studies conducted showed that no other question was as influential in predicting behaviour. However, more than the question alone to calculate NPS is needed, and the second key element of the NPS system is the second question: Why?
By asking the customer to tell us in their own words why they gave this rating and not another, it allows us to understand what action we have taken and what else we can improve.
These two elements are the foundation of the Net Promoter System.
I strongly recommend the article by Fred Reichheld on HBR, describing how the NPS was created.
A second phenomenal source is a site by Bain & Company entirely devoted to Net Promoter Score, which I heartily recommend and which I used to create the article.
How it all works.
The study starts with a survey asking: How likely you are to recommend the company/product to a friend or colleague?
People then score on a scale from 0–10, where 0 means they would not recommend it and ten means they would recommend it. The responses are then divided into three groups.
Promoters (Promoters): Ratings 9–10
Loyal to a company or product. They will persuade others to use the service. They will remain loyal to the company and should increase the number of products or services purchased over time. Data shows that 80% of company referrals come from this group. They work well with the company’s employees. Promoter satisfaction and loyalty are essential in the long term.
Passives: Ratings 7–8
Also called passively satisfied. Competitors may persuade a group that is satisfied with the company for the time being to change. Their number of referrals can be up to 50% less than that of promoters. The company should take measures to increase loyalty and prevent these people from becoming detractors.
Detractors: Ratings 0–6
Detractors are dissatisfied customers who account for more than 80% of negative comments about our company or product. This group has the highest churn rate. Significantly, even though these users pay for our products, they contribute to discouraging other potential customers from using them. In the long term, the action of detractors can critically undermine our business, so the role of the CS team should be to understand where the problems are coming from and how to put remedies in place quickly to increase the loyalty of these customers.
To calculate the level of NPS, we need to figure out what percentage both promoters and detractors represent and then subtract them from each other according to the formula:
NPS = %promoters — %detractors
The indicator can take values from -100 to 100.
To be continued
That’s it for today. In the following article, I will tell you about the advantages of using the NPS and the criticisms it has to face, and I will also give you an idea of how the Inner and Outer loops in the NPS work.
Let me know in the comments if you guys use NPS in your teams and what you think!