THE ABC's of NPS

By Ed Fenwick
Senior Vice President

Net Promoter Score (NPS) is gaining a lot of attention lately as a way to gauge customer attitudes toward a company. Just as net worth represents the difference between financial assets and liabilities, NPS quantifies the difference between customer assets and liabilities. It is determined with one question—“Would you recommend us to a friend or colleague?”—and responses are recorded on a 10-point scale. With that one question, customers can be sorted into three categories: “promoters” who are loyal and enthusiastic (a 9 or 10 response), “passives” who are satisfied but unenthusiastic (a 7 or 8 response), and “detractors” who are unhappy but feel trapped in a bad relationship (a 1–6 response). To calculate an NPS, subtract the percentage of detractors from the percentage of promoters.

This hot business idea has a number of proponents in the financial services industry. American Express, Progressive, and Allianz have adopted it broadly. Allianz even went so far as to announce its mediocre score to investors in July with a vow to improve.

The approach clearly has appeal:

Like most trendy business ideas, NPS suffers from over-promotion. Initial developers claimed that a “12-point increase in a company’s NPS doubles its growth rate.” They have since backed off that stance, now stressing instead that companies with a strong NPS tend to grow faster than others in their industry. This rewording subtly moved their view of NPS from causation (high NPS causes growth) to correlation (high NPS and growth are related), which is where it should be. It can help your company focus on customer metrics, which will improve your responsiveness to your customers in the long run.

The approach is gathering steam at a time when CEOs are increasingly focused on getting closer to customers. It also plays into executives’ lamenting that loyalty management programs, which track customer retention, are among the most ineffective tactics in their toolbox. Pair that with mounting recognition of the power of word of mouth and social networks and it's easy to see why buzz is building. At GE's annual global leadership meeting in Boca Raton, Fla., CEO Jeffrey R. Immelt greeted the approach with enthusiasm. As a result, in 2006 all GE businesses must report NPSs for the first time. "I have little doubt that this will be as big and long-lasting for GE as Six Sigma was," says Immelt of GE's vaunted and much-copied quality system.

With rhetoric like that, it's no wonder that net promoter scores are becoming a popular, and, many say, powerful way to measure customer loyalty, drive compensation, and flag troubled products. By asking customers whether they would put their own credibility on the line by recommending a company to a friend, net promoter scores, say fans of the concept, are truer indicators of loyalty and future behavior and, therefore, sales growth.