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Understanding NPS [Net Promoter Score]

August 27, 2021

Raw data around product usage and activity may not always accurately determine the health of your customer. You may have frequent users as a result of business requirements - but they may be unhappy and looking for an alternative solutions.

One of the most commonly used metrics for measuring customer satisfaction is Net Promoter Score.

Net Promoter Score (NPS)

The Net Promoter Score or NPS refers to a measurement taken from asking customers how likely they would be to recommend your product to a friend or colleague. Customers are asked to rank this on a scale of 1-10.  

NPS can be collected via relational surveys or transactional surveys:

  • Relational surveys are sent out bi-annually or quarterly to gain a periodic snapshot of how your customers are feeling.
  • Transactional surveys are sent out following an interaction of a customer with your business, allowing more detailed insights.

It is recommended to utilise both methods of collection. This is because it provides a more holistic view of your business by assessing it at a micro and macro level.

Pros And Cons Of Measuring NPS

Pros:

  • Allows you to track and quantify customer reactions over time.
  • Provides data that allows businesses to develop a targeted, mission critical goal.
  • Works for businesses of all sizes from a small local store to huge multinational companies.

Cons:

  • Lacks context. Doesn’t provide enough information on its own, NPS needs additional follow-up questions to be of highest value to decision makers.
  • Sample sizes can be too small to provide accurate data.
  • Relies on business to solicit feedback.

How To Calculate NPS Score

First of all, categorize your respondents:

  • Customers who answer the NPS question with a 6 or lower are known as detractors.
  • Customers who answer with a 9 or 10 are counted as promoters.
  • Those that rank between 6 and 9 are known as passives, and their response is not usually counted.

To calculate your business’ NPS score - simply minus the percentage of your detractors from your promoter percentage.

Steps to calculate your NPS score:

  1. Add up the total responses from each group.
  2. Take the group total and divide it by the total number of responses.
  3. Subtract the detractor percentage from the promoter percentage

The result is your NPS score.

NPS Score = % Of Promoters - % Of Detractors

Understanding Net Promoter Score [NPS]

Raw data around product usage and activity may not always accurately determine the health of your customer. While you may have frequent users, they may still be unhappy and looking for alternative solutions. Therefore, it is important to constantly ensure the quality of customer retention.

One of the most commonly used metrics for measuring customer satisfaction is Net Promoter Score or NPS. Experts around the globe consider the NPS measurement to be one of the best indicators of loyalty to a company or product.

In this article, we’ll explain what the NPS is, how to calculate it, and why you should apply it in your business.  

Net Promoter Score (NPS) concept

Net Promoter Score (NPS) is a market research metric that helps a company determine the attitude of customers to a product and their willingness to recommend this product to a friend or colleague. To measure the NPS, customers are asked to rank this on a scale of 1-10.  

Pros And Cons Of Measuring NPS

Experts highlight both the advantages and disadvantages of measuring the NEt Promoter Score. Let’s look through them.

Pros of measuring NPS:

  • Helps with tracking and quantifying customer reactions over time;
  • A great benchmarking tool that allows you to see the main trends in the market and set clear measurable goals for the company.
  • Relevant for companies of various sizes - from small local businesses to enterprises.

Cons on measuring NPS:

  • It is difficult to obtain detailed information by asking just one question, so when a negative score is received, additional follow-up questions are required.
  • The sample sizes can be too small and thus not representative enough to provide accurate data.
  • The metric calculation requires a business to solicit feedback, which sometimes can be unwanted.

How To Calculate NPS Score

To calculate the Net Promoter Score, you need to start by collecting feedback from users. This can be done via relational surveys or transactional surveys:

  • Relational surveys are sent periodically (once a year, once every six months, or once a quarter) to evaluate the overall customer satisfaction and loyalty.
  • Transactional surveys are aimed to assess the specific interaction with a customer, rather than the overall loyalty.

It is recommended to utilize both methods of feedback collection. This way, you can provide a more holistic view of your business by assessing it at both micro and macro levels.

To calculate the Net Promoter Score, customers are asked: "How likely is it that you would recommend the company's products and services to friends and colleagues?”, and then provide their answers on a scale from 0 to 10.

After having collected the feedback, you need to categorize your customers:

  • Respondents who give a score of 6 or lower are known as detractors.
  • Respondents who give a score of 9 or 10 are counted as promoters.
  • Those who give scores between 6 and 9 are known as passives, and their feedback is not typically counted.

The final stage is the calculation of the NPS Score. To do this, simply subtract the percentage of your detractors from the percentage of your promoters.

The formula for calculating NPS is as follows:

NPS Score = % Of Promoters - % Of Detractors

For example, if 70% of respondents gave a score of 9 or 10, and 10% of respondents gave a score of 1-6, the NPS Score would be (70% - 10%) x 100 = 60. This is quite a good indicator since most of the customers are the company’s promoters.

What is a good NPS?

The Net Promoter Score can range between -100 and 100, where -100 is the worst and 100 is the best.

How to interpret the actual NPS values? Here is a common approach:

  • An NPS above 50 - everything is wonderful, but you still can't relax;
  • An NPS from 30 to 50 - not bad, but it still could be better;
  • An NPS beyond 30 is an unkind sign;
  • An NPS beyond 0 - it's time to urgently take action.

However, before putting every effort into achieving an NPS of 50 and more, consider your niche, your product offering, and pricing. Every company is unique, and there is no precise definition of which metric value is good.

Here are the average Net Promoter Score values for various industries:

  • Car sales - 48
  • Software - 41
  • Major appliances - 40
  • Insurance - 37
  • Retail - 35
  • Banks - 32
  • Hotels - 37
  • Internet Service - 24

Why SaaS companies measure NPS

It's hard to find a SaaS company today that doesn't track their NPS on an ongoing basis. Let's look at the top reasons why business owners and marketers choose to track this metric.

More data in less time

Users don’t like long polls: who wants to spend half an hour noting how they liked the product, or if they have any comments on the service?

Using an NPS survey, you save both customers’ time and your time, since you do not need to collect a large amount of data and perform complex calculations.

Besides, it's very easy to organize a survey: you can ask a question in an e-mail or SMS, embed a special form on the website, or create a survey using a third-party service and spread it through social media.

Setting a measurable goal

The growth of the Net Promoter Score is influenced by a variety of factors, including product improvements, an effective marketing campaign, or a profitable offer. So, it is very convenient to designate a company's KPI through a certain NPS score level.

Improving customer retention

It’s not a secret anymore that retaining the existing customers is more profitable than attracting the new ones. So, the more loyal your customers are, the more likely they are to stay with you. By constantly measuring the NPS, you will keep track of your customer loyalty.

Getting insights on customer segments

Measuring the NPS allows you to correlate the level of customer loyalty and other criteria, such as the age or gender of the respondents. This way, you can get insights on which groups to focus on (promoters, passives, or detractors) to get the best results and define an optimal approach towards each segment.

Final notes

SaaS companies use the Net Promoter Score as a way to measure customer loyalty and satisfaction.

Being a relatively inexpensive and easy to process technique, NPS measurement provides you with real-time data and timely alerts about the issues that need to be fixed or benefits that should be preserved. Therefore, it is important not only to find out the NPS value but also to understand what exactly led to such a result. Focus on the feedback you get and try your best to improve your customer experience and retention.

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