Many people have heard the term “NPS” but don’t know what it means.
NPS is a management metric that quantifies
customer loyalty
. Let’s take a look at what NPS is, how it differs from customer satisfaction, how it’s calculated, and why NPS is just as effective for B2B.
What is NPS?
NPS (Net Promoter Score) is a management index that quantifies customer loyalty.
Because it has a high correlation with business performance, many companies have introduced it as an alternative to customer satisfaction.
When using web sites and tools,
“How likely would you be to recommend this service to a close friend, colleague, or family member? Please answer on an 11-point scale from 0 to 10.”
Have you ever been asked this?
This is the question to measure NPS.
In Japanese, NPS (Net Promoter Score) is the “net ratio of promoters.”
Respondents are classified into “promoters,” “neutrals,” and “detractors” based on their scores, and the ratio is calculated by subtracting the percentage of detractors from the percentage of promoters.
The same correlation of NPS to business performance is seen in B2B as well.
Many companies are also starting to implement NPS in BtoB, as it allows them to simply measure relationships with BtoB customers, which tend to be complex.
How to calculate NPS
To calculate NPS, respondents are categorized into three categories: promoters, neutrals, and detractors, as shown in the table below, based on the scores of their answers to the questions above.
Score classification
9-10 points Recommender
7-8 points Neutral
0-6 points Critics
NPS is calculated by calculating the ratio of promoters and detractors to the total number of respondents, and subtracting the ratio of detractors from the ratio of promoters, as shown in the formula below.
NPS = Promoters (%) – Detractors (%)
For example, if you ask 100 people, the promoters and detractors will each
- Recommender: 20 people (20%)
- Critics…50 people (50%)
If so, the NPS will be “-30 points”.
The difference between NPS and customer satisfaction is that it is correlated with business performance.
Traditionally, many companies have conducted surveys on customer satisfaction. NPS differs from customer satisfaction in that it has a close correlation with business performance.
Many studies have shown that companies with high NPS have high performance, and conversely, companies with low NPS have poor performance.
On the other hand, we know from many examples that customer satisfaction does not necessarily correlate with business performance.
For example, one study found that approximately 80% of customers who canceled or otherwise defected had answered “satisfied” in a previous customer satisfaction survey.
In other words, even if a customer answers “satisfied” in a customer satisfaction survey, it does not necessarily mean that they are a “loyal customer” or that they will return to the company again.
No matter how much you research customer satisfaction, the results will not necessarily lead to sales.
For this reason, attention has been focused on NPS, which is directly linked to business performance.
NPS was invented by Fred Reichheld of Payne & Company.
In his book “Net Promoter Management,” Mr. Reichheld uses the example of General Motors as the inspiration for developing NPS.
In 2005, General Motors performed poorly and had its corporate bond rating downgraded to non-investment grade, despite winning numerous awards in customer satisfaction surveys.
From this incident, research began on ways to measure customer loyalty more directly linked to business performance, and NPS is said to have been devised.
NPS is also effective for BtoB
NPS, which many companies have already implemented, can also be effectively used in BtoB.
The reason for this is that the correlation between NPS and business performance can be seen in B2B as well, and that NPS allows you to simply measure the relationship with B2B customers, which tends to be complex.
●Correlation with NPS performance can also be seen in BtoB
Payne & Company conducted a detailed study on the relationship between NPS and business performance for BtoB companies.
The results show that promoters have 3 to 12 times more average lifetime value than detractors.
In addition, NPS is a BtoB company’s
- sales growth rate
- profit margin
- market share
- Sales/sales efficiency
- employee engagement
It was found that there is a positive correlation with both.
●With NPS, you can easily measure relationships with customers, which tend to be complex.
Generally, in BtoB, the customer is an organization, so the relationship with the customer tends to be complex. In an organization, decisions regarding the purchase of products are made by
- Direct person in charge of purchasing
- End users who actually use the product
- decision maker
- People from other related departments
This is because many people from different positions will be involved.
Even complex relationships with customers can be easily measured using NPS.
If you conduct an NPS survey of your stakeholders, you can quantify their customer loyalty.
For example, even if the NPS of the person in charge or the end user is high, if the NPS of the decision maker is low, the evaluation from the organization as a whole may be low.
summary
◆ NPS is a management index that quantifies customer loyalty.
◆ Unlike customer satisfaction surveys, many companies have introduced it because it has a high correlation with business performance.
◆ The calculation method is simple: subtract the percentage of critics from the percentage of promoters.
◆ NPS is equally effective in BtoB