Net Promoter Score as a key performance indicator
OK, straight to the point. We decided to start a series of blog posts explaining how the software we build helps our clients. What is the purpose of those shiny web applications? First off is our NPS dashboard developed for companies such as Philips, Heildelbergcement and Abdul Latif Jameel. To get a good understanding of the value of such a system, we need a little background.
What is an NPS?
The term “Net promoter score” was first introduced by Fred Reichheld in his 2003 Harvard Business Review article “One Number You Need to Grow”. It was easy to see the benefits of a single-question format as opposed to a lengthy customer satisfaction questionnaire. What’s more, there was a visible correlation between NPS and long-term company growth.
The way NPS is calculated is easy – you ask your customers “How likely is it that you would recommend our company to a friend or colleague?” on a scale of 0 to 10. Depending on their response, you group them in either Promoters (9-10), Passives (7-8) or Detractors (0-6). Then you subtract the percentage of Promoters from the percentage of Detractors and you get your NPS. Bearing in mind, that the score can vary from -100 to +100, an NPS of 0 is considered OK, while +50 is excellent.
If you want to be extra thorough, it doesn’t hurt to ask the question “Why?”. Why would/wouldn’t customers recommend your company to someone? This gives you valuable feedback that you can take action on, in order to improve your product or services. The challenge comes with actually collecting your empirical data. Here’s where our custom solutions come in handy. The NPS dashboard we’ve developed for our clients can be used to directly collect information from the end customer, analyse the collected data and visualize graphics that anyone can understand with just one look. This significantly speeds up the whole process of calculating the NPS and extracting a business logic from the results.
Limitations of NPS
No doubt the NPS provides a valuable opportunity to understand and improve customer loyalty, but it also has it’s limitation. First of all, you shouldn’t stress over small changes in NPS results between surveys. It’s often quite hard to obtain a large enough sample to significantly reduce the margin of error, as it depends on your sample size. Additionally, NPS shouldn’t be used to replace product strategy. It’s more a tool that can help you define specific steps that you can take to improve your already existing strategy. Finally, you should bear in mind that because of the infrequent nature of NPS, traditional day-to-day metrics should still be a focus of interest, e.g. sales, acquisition, engagement, etc.
Graphic source: www.getcloudcherry.com