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What Is NPS? The Ultimate Guide

When I'm preparing to make a big decision -- on a new apartment, a different job, or a vacation destination -- I usually do two things:

I consult the internet to conduct research, and I ask my friends and family what they'd recommend.

Recommendations from friends and family are incredibly valuable to your customers. According to Nielsen's Global Trust in Advertising Report, 83% of respondents said they trust recommendations from family and friends more than any other form of advertising.

Think about that for a second. This statistic means that even if you do everything right -- even if everything from your logo to your blog posts to your marketing email subject lines is perfect -- one customer's bad experience with your brand could cost you new business. In fact, customers are more likely to talk about a bad experience with your brand than a good one -- and they tell almost 3X as many people when it happens.

Nowadays, with the help of social media, your customers can quickly share recommendations -- and negative reviews -- with their entire networks with just the press of a button. This makes collecting customer feedback and identifying headaches as quickly as possible -- not only to prevent bad customer experiences and reviews, but also to make your customers so happy that they recommend your brand to friends and family.

This is where the NPS, or Net Promoter Score, comes in.

In this post, we'll give you an overview of:

1) What Is NPS?

2) How to Calculate NPS

3) Why NPS Is Important

What Is NPS?

NPS stands for Net Promoter Score. It's a customer satisfaction benchmark that measures how likely your customers are to recommend you to a friend.

How to Calculate NPS

To calculate your NPS, you first have to survey your customers. The NPS is the typical answer to the question "On a scale of 0 to 10, how likely are you to recommend to a friend?" The responses to this question can be categorized into three groups:

  • Promoters: Customers who answer the question with 9-10
  • Passives: Customers who answer the question with 7-8
  • Detractors: Customers who answer the question with 0-6

As you might be able to infer from the names of these groups, promoters are enthusiastic, loyal customers who will tell their friends about your business and bring in new customers. Passives are indifferent and could become promoters -- or they could switch to your competition. Detractors are unhappy customers, and not only are you at risk of losing them, they could do damage to your brand by sharing their bad experiences with other people.

To calculate Net Promoter Score, subtract the percentage of detractors (customers who wouldn't recommend you) from the percentage of promoters (customers who would recommend you).

Tally up how many responses you earned in each category, and subtract your detractors from your promoters to determine the net likelihood your typical customer would recommend to a friend. Passive responses are left out of the equation because they can't be counted on to either recommend or give negative reviews.

The key to achieving a high NPS is having a greater number of promoters than detractors -- like, a lot more.

For example, imagine you surveyed 100 customers. If 40% were detractors and only 50% were promoters, your NPS would be 10 (50% - 40% = 10).

But if you surveyed your 100 customers and only 20% were detractors, your NPS score would jump up to 30 -- representing a 20% greater chance your customers will recommend you to a friend.

Consistently surveying customers and learning how they talk about your company to friends and family helps identify risks, areas of opportunity, and ways to improve. That's why we recommend including space for customers to comment and leave qualitative feedback about how you can improve. From there, you can source specific customer pain points and ways to improve their experience.

Why Is NPS Important?

Evaluating Customer Loyalty

Customer NPS helps brands evaluate customer loyalty -- and the likelihood of them recommending to a friend. It also helps evaluate the likelihood of customers churning -- canceling their subscription or not repurchasing and seeking out a product or service from a different company.

Not only is it significantly cheaper to retain an existing customer than to acquire a new one, it's profitable, too. Research from Bain & Company found that an increase in customer retention of only 5% can increase profits between 25 and 95%. So, while you want to attract and convert new customers, but retaining and empowering existing customers has an even higher ROI.

Needless to say, identifying customers at risk of churning is a key aspect of making this possible, and measuring customer NPS over time helps companies do just that.

Changes in the overall NPS give companies an idea of how likely it is the average customer will recommend to a friend. But changes in the breakdown of scores -- between promoters, passives, and detractors -- also gives customer success teams an indication of which direction the overall NPS is trending.

For example, if the number of detractors decreases and the number of passives increases, that could mean that customer perception is trending positive. But a decrease in promoters and an increase in passives, on the other hand, could indicate risk of customer churn and negative reviews.

Changes in the customer NPS could be a good indicator -- or red flag -- of the current state of customer satisfaction -- and the potential risk of churn.

Mention used NPS surveys to cut its churn rate in half -- in just two months. Based on the responses received, Mention sent out custom emails and offers to customers depending on their level of satisfaction (or lack thereof). Promoters were offered a discounted upgrade to their product, passives received an extended free trial period, and detractors were thanked for their honesty -- and asked how things could be improved. Check out the details of their experiment below.

Identifying Ways to Improve

Customers might answer the NPS question with a low score, or even a 0. It's tough when that happens -- especially if it happens more than once -- but it also presents an opportunity to zero in on customer feedback and make product or service improvements accordingly.

That's why we suggest an NPS survey with additional space for customers to leave specific comments about why they gave the score they did. That way, you can evaluate qualitative feedback about customers who might pinpoint specific things you can change to improve their experience with your product or service.

Sure, not all feedback will be helpful -- there will always be trolls on the internet -- but specific notes about bugs, poor user experience (UX), or a bad call with a customer success manager could be quickly routed to the responsible team to address.

At Magoosh -- an online standardized test prep resource -- NPS helped flag a customer complaint that contributed to a lower score -- and identified where to improve for the customer. Once a mismatched algorithm was identified in NPS data, Magoosh could double down on making it as helpful and accurate as possible for its customers, and its NPS improved by nine points as a result.

Referral Marketing

Customer NPS gives companies an idea of how likely they are to earn recommendations from happy customers -- which, as it turns out, carry a lot of weight.

  • More than 80% of happy customers are willing to provide recommendations.
  • Nearly 70% of respondents were more likely to purchase a product if a friend talked about it on social media or email.
  • Referred customers have a 16% higher lifetime value -- and greater ROI -- than others.

Companies can harness the power of referral marketing by asking for customer case studies, testimonials, and online reviews to tempt potential new customers, and brand ambassador and incentive programs can, in turn, reward customer loyalty with gift cards, swag, or discounts. Referral marketing can be a symbiotic arrangement between brands and customers, but you need to make sure you have happy customers first, and NPS results can help identify those happy customers.

Airbnb used NPS data to predict future interactions with the service -- such as rebooking or recommending to a friend -- for over 600,000 users. It found that customers with an NPS score of 10 (promoters) were 13% more likely to rebook and 4% more likely to refer a friend than detractors. Then, Airbnb analyzed other sources of customer feedback -- such as host reviews and value ratings -- and determined the NPS as the biggest predictor of future rebooking and referrals.

airbnb-rebooking-data.pngSource: Airbnb

Once you analyze NPS data and (hopefully) find many happy promoters, don't stop there. Open up a dialogue with happy customers and see if you can engage them in a referral program to keep them satisfied -- and acquire more customers in the process.

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