Net Promoter Score (NPS)

Definition - What Does Net Promoter Score (NPS) Mean?

Net Promoter Score (NPS) is a customer loyalty and satisfaction metric used to gauge the likelihood that a customer would recommend a company's products or services to others. NPS measures the overall satisfaction of customers and their willingness to act as promoters for a brand, product, or service. Developed by Fred Reichheld, Bain & Company, and Satmetrix in 2003, NPS has become a popular tool for businesses to assess customer loyalty and satisfaction.

Purpose and Role

The main purpose of NPS is to measure and track customer satisfaction and loyalty over time. By providing a simple metric, NPS allows companies to identify areas for improvement, evaluate the effectiveness of customer service initiatives, and benchmark their performance against industry competitors. NPS can be used to predict customer retention, referral rates, and overall business growth.

Components and Calculation

NPS is calculated based on customer responses to a single question: "How likely are you to recommend our company/product/service to a friend or colleague?" Respondents rate their likelihood to recommend on a scale from 0 (not at all likely) to 10 (extremely likely). Based on their ratings, customers are then classified into three categories:

Promoters (9-10): Loyal enthusiasts who are highly likely to recommend the company and drive business growth.
Passives (7-8): Satisfied but unenthusiastic customers who may switch to competitors if given a better option.
Detractors (0-6): Unsatisfied customers who are likely to speak negatively about the company and potentially harm the brand's reputation.

The NPS is calculated using the following formula:

NPS = (Percentage of Promoters - Percentage of Detractors) × 100

NPS scores range from -100 (all customers are detractors) to +100 (all customers are promoters).

Importance and Benefits

NPS offers several benefits to businesses:

Simplicity: NPS is easy to understand and communicate, making it a widely accepted metric for customer satisfaction.
Benchmarking: NPS allows companies to compare their performance with industry peers and track changes over time.
Predictive power: NPS has been shown to correlate with customer retention, referral rates, and business growth.
Actionable insights: By identifying promoters and detractors, companies can take targeted actions to improve customer satisfaction and loyalty.

Example

Suppose a company surveys 100 customers and receives the following results:

60 Promoters (rating 9-10)
30 Passives (rating 7-8)
10 Detractors (rating 0-6)

To calculate the NPS:

Percentage of Promoters = (60/100) × 100 = 60% Percentage of Detractors = (10/100) × 100 = 10%

NPS = (60% - 10%) × 100 = 50