NPS is based on the fundamental perspective that every company's customers can be divided into three categories. "Promoters" are loyal enthusiasts who keep buying from a company and urge their friends to do the same. "Passives" are satisfied but unenthusiastic customers who can be easily wooed by the competition. And "detractors" are unhappy customers trapped in a bad relationship. Customers can be categorized based on their answer to the ultimate question.
The best way to gauge the efficiency of a company's growth engine is to take the percentage of customers who are promoters (P) and subtract the percentage who are detractors (D). This equation is how we calculate a Net Promoter Score for a company:
P — D = NPS
While easy to grasp, NPS metric represents a radical change in the way companies manage customer relationships and organize for growth. Rather than relying on notoriously ineffective customer satisfaction surveys, companies can use NPS to measure customer relationships as rigorously as they now measure profits. What's more, NPS finally enables CEOs to hold employees accountable for treating customers right. It clarifies the link between the quality of a company's customer relationships and its growth prospects.
How do companies stack up on this measurement? The average firm sputters along at an NPS efficiency of only 5 - 10%. In other words, promoters barely outnumber detractors. Many firms—and some entire industries—have negative Net Promoter Scores, which means that they are creating more detractors than promoters day in and day out. These abysmal Net Promoter Scores explain why so many companies can't deliver profitable, sustainable growth, no matter how aggressively they spend to acquire new business. Companies with the most efficient growth engines—companies such as Amazon, HomeBanc, eBay, Harley-Davidson, Costco, Vanguard, and Dell—operate at NPS efficiency ratings of 50 - 80%. So even they have room for improvement.
In concept, it's just that simple. But obviously, a lot of hard work is needed to both ask the question in a manner that provides reliable, timely, and actionable data—and, of course, to learn how to improve your Net Promoter Score
Word-of mouth economics at Dell
To show how to calculate word-of-mouth, an essential component of NPS, a small Bain team quantified the value of promoters and detractors in the personal computer business. The team used only publicly available data so that what they did could serve as a model for companies that lack sophisticated databases. Indeed, the same approach can be used by prospective investors—even by competitors—to understand a firm's customer-relationship economics.
The Bain team focused on the industry leader, Dell, and calculated the value of detractors and promoters for Dell’s consumer business. The results of this analysis are displayed in the figure below: while securities-analyst estimates indicate that the average consumer is worth $210 to Dell, in fact a detractor costs the company $57 while a promoter generates $328. The economics of word-of-mouth was the biggest source of difference between the average value of a customer (based on conventional accounting methods) and the true economic value of promoters and detractors.
Now, here's a step-by-step calculation of the value of this positive word-of-mouth.
- In the survey, 25% of new customers said the primary reason they chose Dell was referral. So, 1 million of Dell's 4 million new customers in 2004 came from positive word-of-mouth.
- Since each new customer is worth an average of $210 each, those 1 million new customers were worth $210 million to the company.
- If 40 million positive comments generated $210 million in value, each positive comment was worth $5.25.
- Given that the average promoter reported making positive comments to about 8 people a year, the promoter's positive word-of-mouth is worth $42 (8 × $5.25).
The Bain team's approach reveals the powerful economics of customer promoters. In 2003, Dell had about 8 million consumer customers. The 15% who were detractors cost the company about $68 million (1.2 million detractors at $57 loss per detractor). Converting just half of those detractors into average customers—not an unrealistic target, given that other companies with high Net Promoter Scores typically generate only 3 - 8% detractors—would add more than $160 million annually to the bottom line (600,000 detractors at $267 improvement per conversion). This simple math could help Dell managers place the right level of priority on reducing detractors and increasing promoters.
In short, by moving beyond traditional customer satisfaction surveys and rigorously tracking NPS, businesses can finally create a link between customer feedback and cash flow. Companies can begin to squeeze bad profits out of their income statement and tune up their growth engine for consistently superior performance