The One Metric You Need to Generate Profitable Growth

The one metric you need to generate profitable growth

Posted by Alexandra Kilpatrick on Mar 21, 2018 9:38:46 PM
Alexandra Kilpatrick

When many businesses consider profitability, they don’t tend to think about customer experience. But it’s the companies that take their customer experience to the next level and really consider the customer’s willingness to recommend their products or services that truly elevate their business and bottom line, compared to their competitors.

There’s an emotional connection between a customer’s recommendations and reputation. When customers recommend your company’s product or service, they’re actually placing their reputation on the line to do so. Most customers would only recommend a product or service if they felt intense loyalty, and their colleagues and peers know this, which is what turns recommendations into multiple new customers.

In Frederick F. Reichheld’s 2003 Harvard Business Review study, he said, “The only path to profitable growth may lie in a company’s ability to get its loyal customers to become, in effect, its marketing department.”

So how do we accurately measure customer loyalty? Most customer loyalty surveys are too long and offer low return rates with murky results that are not measurable enough to act on.

In 2003, Reichheld administered a customer loyalty survey of more than 4,000 customers across six industries with 20 questions called the Loyalty Acid Test and discovered that one simple question effectively predicted repeat purchases or referrals, driving profitable growth: “How likely is it that you would recommend [this company] to a friend or colleague?” That’s how the Net Promoter Score, or NPS, was born.

 

What is a Net Promoter Score (NPS)?

A Net Promoter Score, or NPS, is a customer experience score given to a business, based on one question commonly asked to consumers, “How likely are you to recommend this business to a friend?”

Net Promoter Scores measure customer experience with one simple question, and that score can be the strongest sign of the business’ customer loyalty, which, in turn, can signal the difference between a thriving business and one that’s struggling to keep its doors open.

“Our clients have seen incredible progress in improving their customer experience after seeing their NPS and implementing our recommendations,” XAmplifier CEO James Kropp says.


What are Promoters, Passives and Detractors?

  • Promoters are happy, satisfied customers, who have had a superb customer experience and are not just likely to return to your business but also likely to recommend your business to their family and friends. Promoters rate your business as a 9 to 10 when asked whether they would recommend your business to a friend.
  • True to their name, Passives are passively satisfied customers, rating the business as a 7 to 8, who are neither likely to recommend your business nor likely to spread word of a poor customer experience.
  • Detractors, on the other hand, are unhappy customers, who rate your business as a 0 to 6 and are likely to bad mouth your business to their friends and family.

How Do You Calculate Your Business’ NPS?

When calculating NPS, only take into account the percentages of Promoters and Detractors. Ignore the percentage of Passives when calculating your score, because studies show that Passives neither positively nor negatively impact your business’ overall customer loyalty or profitability. Simply subtract the percentage of Detractors from the percentage of Promoters to calculate your business’ overall net promoter score.

NPS = % of Promoters - % of Detractors

Let’s calculate an example NPS together. Say a company has 70 Promoters, 28 passively satisfied customers and two Detractors. To calculate the business’ NPS, ignore the 28 passives, since they don’t affect customer loyalty either way. We have 100 overall customers, so we know that 70 percent are Promoters and 2 percent are Detractors. We simply subtract the Detractor percentage of 2 from our Promoter percentage of 70 to calculate an overall NPS of 68.

NPS = 70 (% of Promoters) - 2 (% of Detractors) = 68


Why are Promoters So Important?

It’s not enough to simply have more Promoters than Detractors. You need to have enough Promoters out there recommending your business to offset the effect of Detractors telling everyone they know to stay away from your business.

“By limiting the Promoter designation to only the most enthusiastic customers, we avoided the ‘grade inflation’ that often infects traditional customer-satisfaction assessments, in which someone a molecule north of neutral is considered ‘satisfied,’” Reichheld said.

“And not only did clustering customers into three categories—Promoters, the passively satisfied, and Detractors—turn out to provide the simplest, most intuitive, and best predictor of customer behavior; it also made sense to frontline managers, who could relate to the goal of increasing the number of Promoters and reducing the number of Detractors more readily than increasing the mean of their satisfaction index by one standard deviation.”

Moreover, NPS is one of the strongest measurements of customer loyalty, and research shows that this customer loyalty is one of the greatest indicators of profitability, because it shows whether or not you have enough happy customers willing to refer new customers to your business.

And Promoters can have a huge impact on your business.

"We found that compared to Detractors, Promoters are more than five times as likely to repurchase from companies, more than seven times as likely to forgive companies if they make a mistake, and almost nine times as likely to try new offerings from companies,” A Temkin Group report, Economics of Net Promoter, 2016, says. “Our research also shows that Promoters recommend a company to an average of 3.5 people."

Consider this example of a customer experience review Capital Dermatology received recently from a Promoter:

“I have seen Dr. Pacheco for more than a decade and have been totally happy with her and her staff the entire time. I have recommended her to many of my friends and I know that at least three of them now routinely see her.”

This customer is not just raving about their outstanding experience with the doctor and staff in the review but also recommending Dr. Pacheco to their friends, who are now regular customers.

High performing reputation locationsor locations with a high NPS—have about twice as many call and click to call/web inquiries and leads per month than low performing reputation locations—or locations with a low NPS.

 

How Can You Boost Your NPS?

Enterprise CEO Andy Taylor felt that the company needed a greater sense of urgency, since their overall NPS was not improving quickly enough. The management team decided that moving forward, field managers would only be eligible for promotion if their branch or branch group matched or exceeded the company’s average NPS.

Implementing this system had a clear immediate impact on the company. Survey scores rose and so did Enterprise’s growth, compared to the competition. Taylor said that linking customer feedback to employee rewards and promotions is one of the biggest reasons Enterprise has continued to grow as a company.

Discover your own business’ NPS and sign up for a demo with xAmplifier today!

Topics: NPS

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