Net Promoters Drive a Company's Growth Engine

More Executives are Using this Metric to Drive Long-Term Viability

Apr 10, 2009

While revenue, EBITDA, and margins are just a few of many financial metrics, lesser known Net Promoter Score is the wave of the future to drive a company's growth engine.

Net Promoter® Score, or NPS, is nothing more than a customer loyalty metric for any size business, but it has more relevance today than ever. The data used in calculating NPS is ascertained by companies asking their customer’s one simple question using a rating scale from one to ten. Once the data is compiled, elementary math is all that is needed to calculate NPS.

Components of Net Promoter Score

Customers are simply asked how likely it is they would recommend a company to a friend or colleague. According to Satmetrix Systems, Inc., Promoters, a nine or ten on the rating scale, “are loyal enthusiasts who will keep buying and refer others, fueling growth.” Passives, a seven or eight rating, “are satisfied but unenthusiastic customers who are vulnerable to competitive offerings.” Detractors, any rating at or below six, “are unhappy customers who can damage your brand and impede growth through negative word-of-mouth. Only Promoters and Detractors are used to calculate NPS.

Calculating Net Promoter Score

One of the greatest aspects of NPS is its ease of calculation. One would start by summing the number of ratings in each of the three categories. Then divide the number of ratings in each of the three categories by the total number of ratings to get the percentage of customers that fall within each category. Finally, subtract the percentage of Detractors from the percentage of Promoters. The answer is your NPS.

A simple example of calculating NPS based on ten ratings: 4 Promoters x 4 Passives x 2 Detractors = 40% Promoters – 20% Detractors = 20% NPS

Benefits of Net Promoter Score

NPS is not a true financial metric, which are most often used to gauge a company’s health and growth potential. NPS is a customer loyalty metric, but it generally has a direct correlation to a company’s health and growth potential. It is used to get a picture of the long-term viability of a company. Obviously, if the percentage of Promoters continues to rise, the odds of long-term viability and health increase. Conversely, if the percentage of Detractors rises to an unhealthy level, a negative NPS for example, the odds of the long-term viability and health decrease.

NPS is also often used to motivate an organization to gain a more intense focus on delivering better products and service to customers. It can rally higher level teams and departments within the organization to perform to deliver actionable steps to increase Promoters and decrease Detractors. It can also rally front line teams and departments to execute the actionable steps more efficiently and effectively.

Finally, surveying and calculating NPS is simple for any organization, large or small. It also can be done by the company or a third party that has access to a company’s or industry’s customer information. Most importantly, it allows a company or industry to directly compare itself to others using the same question, rating scale, and calculation and make changes, if necessary, to compete against another company or industry.

Criticisms of Net Promoter Score

There are three primary criticisms of NPS. First, many researchers and statisticians argue that ‘likely to recommend’ is no better an indicator of customer loyalty than other conventional loyalty-based questions, like overall satisfaction.

Second, many argue that the answer to only one question does not represent a holistic view of a customer’s loyalty.

Finally, the environmental and temperamental state of the customer when they are asked the question may not accurately reflect the customer’s true loyalty to the company. The customer may be in a hurry, may have had a negative experience earlier in the day, or something else that altered their response.

Companies and Industries that Use Net Promoter Score

Philips, GE, Allianz, Proctor & Gamble, Intuit, American Express, Westpac Banking Corporation, Concentra Medical Centers, and BearingPoint are just a few of the more recognizable companies that use NPS.

What Is a Good Net Promoter Score?

The answer varies by industry and the average scores of the players within that industry. For example, the airline industry is an example where most scores are low due to fare changes multiple times per day and the ancillary fees charged for items like checked baggage and changing a reservation.

According to Satmetrix, “companies with the most efficient growth engines operate at NPS efficiency ratings of 50 to 80%. But the average firm sputters along at an NPS efficiency of only 5 to 10%.”

Apple, Costco, Harley-Davidson, and Chick-Fil-A are just a few companies often mentioned in NPS circles for their dominant scores. Each is consistently in the seventies according to research reports and data provided by individual companies.

In an era where competing products and services are available more than ever before, NPS will likely evolve into a common business practice, instead of just a customer loyalty metric, and be utilized more often to drive a company’s growth and revenue engine. NPS is here to stay, whether in its current form or an ever-evolving resource. Use it now to drive your business to the next level.

The copyright of the article Net Promoters Drive a Company's Growth Engine in Customer Management is owned by Ryan Haskell. Permission to republish Net Promoters Drive a Company's Growth Engine in print or online must be granted by the author in writing.