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The net promoter score is a management tool that gauges the loyalty of a firm's customer relationships. By asking customers one question (usually, "How likely is it that you would recommend us to a friend or colleague?"), customers can be categorized into three groups: promoters, passives, and detractors. Promoters represent valuable assets that drive profitable growth because of their repeat/increased purchases; detractors are liabilities that destroy profitable growth because of their complaints, reduced purchases/defection and negative word-of-mouth. By calculating their Net Promoter Score (subtracting their %detractors from their %promoters)firms create a bottom-line metric akin to net worth or net profit, thus enabling managers to prioritize and evaluate loyalty-building initiatives. The NPS concept was created by Loyalty Business Model expert Fred Reichheld of Bain & Company and is discussed in his book ''The Ultimate Question: Driving Good Profits and True Growth''. The net promoter metric has been widely adopted by leading firms including GE, Allianz,Apple, P&G, American Express, HSBC and Philips. The body of related frameworks,tools and processes have evolved into a management discipline known as the net promoter system (NPS). Independent research by Tim Keiningham disputes the claims of Reicheld concerning Net Promoter. In the July 2007 issue of the Journal of Marketing, Keiningham says,
NET PROMOTER SCORE CALCULATION AND INTERPRETATION Companies must determine the single question that best categorizes customers as promoters, passives, or detractors--based on actual loyalty behaviors such as repeat purchase rates, increased purchases, referral rates, etc. For most companies, this ultimate questions turns out to be some version of: "How likely is it that you would recommend us to a friend or colleague?" Responses are scored on a 0 - 10 scale, with 0 meaning ''extremely unlikely'' and 10 meaning ''extremely likely''. The 0 - 10 scale is required for proper NPS calculation. Responses are then coded as follows:
The difference between the percentage of a company's promoters and detractors is the Net Promoter(r) Score. For example, if 50% of a company's customers respond with a 9 or 10, and 30% respond 0 - 6, the company's NPS would be 20%. The Net Promoter metric was co-developed by Fred Reichheld, a well-known loyalty expert and Bain Fellow, and Dr. Laura Brooks of Satmetrix Systems. A customer's response to the "recommend" question typically serves as a strong indicator of that individual's economic value to the company. For example, according to Reichheld's research, customers with higher scores typically buy more, remain customers for longer, and refer others than do those with lower scores. Aggregated across an entire customer set, the Net Promoter score is expected to signify a company's growth potential based on the strength of its customer relationships. It can also help management make the right decisions to facilitate such growth. NPS methodology is credited with the ability to both identify and create fast growth companies and help build Market Share by moving managerial focus away from short-term profits and toward long-term value in positive customer relationships. NPS reports can therefore be used as an additional managerial tool to accompany a firm's Financial Statements . NPS MEASUREMENT PROCESS NPS surveys are performed periodically, or even routinely, on a population of customers for a particular product group or company. NPS measurement is usually conducted by customer experience management companies, professional opinion survey or Market Research firms rather than the company itself in order to avoid Statistical Bias and to facilitate standardized results. Internal NPS surveys can also be very effective as long as the Methodology is well-trusted and results can be audited/validated). Net Promoter scores enable firms to compare their performance across product-lines, customer segments and sales or service teams. This enables managers to rank performance and establish accountabilities. Gathering scores of competitors in the same line of business can also identify best practices and provide strategic insights. However, caution must be exercised when comparing scores across different countries because of customers' cultural scoring biases. The power of the net promoter system is not in the calculation of the score--that is simply a useful bottom line metric enabling senior executives to gauge progress and set priorities. The real power of NPS is the systematic process that ensures the right employee(s) will take appropriate action when they discover their customer is a detractor, passive, or promoter. The systematic closed-loop process for learning root causes and responding appropriately is the foundation for improving loyalty and accelerating profitable growth. INDUSTRY EXAMPLES Research by (GE), for example, plans to use NPS as a metric to decide the compensation of its leaders.http://www.ge.com/ar2005/letter_common.htm REFERENCES
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