Saturday, 7 June 2008

Net Promoter Score

Loyalty guru Fred Reichheld has started a real buzz going with the concept of Net Promoter Score, which is being implemented in a host of companies around North America - and we will probably see it in Europe soon as well.

The idea is that you can use NPS to measure your marketing efforts as an organisation by determining client satisfaction and using this very simple metric to improve your revenues and profitability.

The very simple explanation of the Net Promoter Score is that you have to identify the percentage of customers who rave about your products/services/company and are telling all of their friends, peers, or clients about it (9 or 10 on a scale of 1 - 10) minus the percentage of detractors - those who are not satisfied enough, and could even be badmouthing your brand in public (those who would score your organisation at 1 - 6 on the scale).

In other words, if 50% of your clients absolutely love you and 15% are not satisfied then your score is 50 - 15 -> NPS = 35.

Now let's try and take this concept into the real world... Competing for customers' share of mind has become increasingly difficult through the proliferation of media, which are all bombarding us with louder and louder messages from more and more desperate brand owners trying to stand out from the crowd. We're all fed up with companies telling us that they're the best. Why should we believe them? We're much more likely to believe a recommendation from a friend/peer/family member etc. who has already experienced a product/service that they love and rave about. If we trust their judgments in most matters then we will also be likely to trust their product and service recommendations if we have similar tastes and preferences.

Trying to compete through above-the-line advertising can often be seen as an expensive exercise in futility and it can be almost impossible for a small brand. Trying to harness the power of your loyal customers is often a lot easier - and a hell of a lot cheaper to boot! Back in the early 1990s, 30% of Apple's customers described themselves as "evangelists" for the brand and they not only helped create new "converts to the cause" they were also the most profitable customer segment as they would literally lap up any new product that came out. The big problem was that they also had a lot of detractors meaning that their NPS score was probably quite low. According to research by Bain & Company, the average NPS metric in the US is 15!

The key argument behind the Net Promoter Score is that a 12 point increase in the metric leads to a doubling of the rate of revenue growth, something Fred Reichheld argued in his book "The Ultimate Question" from 2006. It also states that one of the key opportunities lies in the methodology of ensuring you get buy-in from your customers in doing the research and not just asking what score they gave you, but why they gave you that score. Being able to have these frank discussions with the detractors from your brand gives you an opportunity to win them over and convert them to become "promoters" - one of the keys of "A Complaint is a Gift" as well.

Read more about Net Promoter Score in Fortune Small Business or visit Netpromoter.com.

4 comments:

Dr. B said...

You note a NPS of 35 that is based on 50 positive and 15 negative. Is a company with this NPS better or worse than a company with 60 positive and 25 negative which yields an NPS of 35?
Dr. B (thecustomerinstitute.blogspot.com)

Casper Moller said...

Personally, I would prefer the example you mention as it means that not only do you have a much higher degree of very high loyalty already (60% versus 50%), but it is also an indicator that there are still massive improvements that can be made and through speaking to customers indicative of 25% of all of them should put you in a position, if handled correctly, of improving even more.

However, I would recommend that you read the thoughts of Fred Reichheld, Paul Marsden and others at the Net Promoter blog:
http://netpromoter.typepad.com/

Deborah Eastman said...

Dr B. You raise an important point. It's not just about the score, it's about the distribution of the score. Casper's right, more promoters are good, but more detractors are bad.

Satmetrix recently did a study on the economic impact of word of mouth, connecting Net Promoter to positive and negative referal behaviors. Interestingly it showcases Apple and the B2C hardward industry. You can download here:
http://satmetrix.com/resources/whitepapers.htm

By the way Casper, NPS has already found it's way over the pond. You can read about European companies that presented at the recent Net Promoter Conference at:
http://netpromoter.typepad.com/conference_europe_2008/

Deb Eastman, CMO
Satmetrix
co-developer of Net Promoter

Alex Horovitz said...

The Net Promoter score does identify the level of Loyalty that might exist in your customer base. But it does not give you the tools to improve your Customer Loyalty over the long run. Brookeside can do that