Net Promoter Score: What Small Businesses Can Learn About Loyalty

There are two primary ways to grow a business: Invest heavily in marketing to recruit and retain customers—or develop such strong loyalty among your existing customers that they do much of the leg work for you.

The latter is a telltale sign of a solid business—and it can be quantified in what’s known as the net promoter score, or NPS. Put simply, it measures the willingness of customers to recommend a company’s products or services on a scale of -100 to +100.

At the heart of NPS is the notion that it is six to seven times more expensive to attract a new customer than to retain an existing one. But this metric is also telling of how a company’s products or services are viewed by the broader public. In addition to measuring overall satisfaction, NPS can serve as an ongoing checkpoint for how a new product, a new service, a change in direction, or even a change in management impacts the overall brand.

A Key Indicator of Customer Loyalty

The concept of NPS made its debut in 2003 when loyalty business marketing guru Fred Reichheld published an article in the Harvard Business Review outlining the concept he developed with Bain & Company and Satmetrix.

In its basic form, an NPS is calculated from a single question, such as: On a scale of 0-10, how likely are you to recommend our product to friends or family?

The universe of responses is divided into three categories, which correspond with customer types: Promoters rate a company 9 or 10, and are loyal customers who are likely to recommend its products or services to others. Passives rate companies 7 or 8 and are generally neutral. Detractors score companies 0 to 6 and are unhappy customers who may even dissuade others from using a product or service.

To calculate NPS, the percentage of negative scores are subtracted from the percentage of positive scores. For example, if Brand X’s negative scores were 30 percent and the positive scores were 60 percent, the NPS would be +30, which is 60 percent positive minus 30 percent negative.

Big Brands Dig Into NPS Data

Many companies across different industries use net promoter scores in various ways. According to Bain & Company, which tracks NPS users through public SEC filings, household brands such as Delta Airlines, GE, Anheuser Busch, University of California-Berkeley, Autodesk and DirecTV use NPS to aid their businesses in measuring potential future growth, tracking customer acquisition costs, improving customer service and finding the best prospects for upselling.

Companies interested in bringing NPS into the fold should keep in mind that scores tend to vary by industry. For example, an e-commerce company with a score of +50 may sound good, but that mark falls below the industry average of +63. Likewise, a score of +30 for a restaurant may seem on the low side, but it greatly exceeds the average NPS of +17 for restaurants.

NPS Tools for Small Business

The benefits of tracking NPS aren't limited to big business. On the contrary, small companies stand to potentially see greater gains from understanding and improving customer satisfaction. Meanwhile, web-based services, such as Rently and SurveyMonkey, offer inexpensive NPS survey options.

The key factor for small companies to understand is that NPS is more than a one-and-done exercise. The real value is in gauging how it changes over time. For example, a company that sees two low or decreasing scores in a row might review its products or services, or send a follow-up survey that qualifies likes and dislikes. This outreach may pave the way for new product development or prompt additional questions from a company’s customer service response team to divine the cause of lower scores.

Likewise, scores that come after a new product launch can offer timely market feedback about how customers view the new offering—and what, if any changes, need to happen.

NPS is just one data point, but when used consistently it can be a useful tool to take the pulse of customer sentiment—and see, if, how and potentially why it changes over time. The insight gleaned from a simple question can have profound implications on how companies think about what they do and how that resonates with the marketplace.