In a post I wrote back in January called “Do customer surveys do more harm than good?“, which touched on a strategy called your Net Promoter Score (NPS). This approach is based around the idea that there is such a thing as good and bad profits, where good profits are those that come from that repeat buy and refer you onto other customers and bad profits come from one-time and unhappy customers. If a business can understand this balance and develop it (ie. maximising those customers that repeat buy and refer you on) then it is a sure-fire way of mining a rich seam of potential growth. Fred Reichheld and his colleagues at Bain have data that concludes that companies that are sustainably profitable over the long-term have Net Promoter Scores (NPS) two times higher than the average company and that those that have the highest NPS scores outperform their competitors by a factor of 2.5 times.
How does it work?
NPS is based on the principle that every business’ customers can be split into three groups:
This equation is how we calculate a Net Promoter Score for a company:
While an easy concept to grasp, the NPS idea is a completely different way to manage and organise the way we see customers and how we manage growth. Here’s a video of Tony Hsieh of Zappos.com talking about customer service and how NPS works for them. Watch the video, for two reasons:
Now you probably heard in the video that Zappos have a NPS score of around 85-90%, which is why they have experienced some phenomenal growth. However, the average company only scores about 5 – 10%, meaning that their promoters only just outnumber their detractors.
Are you spending huge amounts on marketing only to feel like you are treading water or running to stand still? Do you think that could be because you have a negative NPS score?
Many companies do have negative NPS scores which explains why they find it a huge task to deliver profits and growth on a sustainable basis, regardless of how much they spend on marketing and acquiring new business. However, there are companies out there like Zappos, Amazon, HomeBanc, eBay, Harley-Davidson, Costco, Vanguard, and Dell etc etc that have NPS scores of between 50 and 80%. Whilst they may still have room to get better, we can learn alot from them.
Hope you enjoyed this post. What could you use from this to grow your business?