profitwell paddle

BIG NEWS: Paddle acquires ProfitWell to "do it for you"

What is Net Promoter Score? Optimizing Your NPS and Building Customer Loyalty

Patrick Campbell Oct 1 2019

What is a net promoter score?

A net promoter score (NPS) is a metric companies can use to measure and index customer loyalty and interest in the brand.

Screen Shot 2017-02-24 at 5.54.27 PM.png

Calculating customers' net promoter scores is a way to quantify their strength as brand promoters. Customers who are willing to put their own reputation and judgement on the line in front of their peers and colleagues to recommend a brand are likely very happy with the brand and the solution it provides. Willingness to promote your brand is a good indicator that they will be successful customers with high lifetime value.

Customers' net promoter scores are an important part of a marketing strategy because they help you understand your customers' perceived value of your product and your customer service. This can inform your marketing messaging, the communication of your value proposition, customer support, and product development.



How do you calculate net promoter score?

A net promoter score is a numerical value generated directly from customer feedback.

Calculate a customer's net promoter score by asking the customer to rank one question on a scale of 1-10:

    1. How likely are you to recommend this company to a friend or colleague?

The customer's answer can be directly applied as their net promoter score. An excellent net promoter score would be 10, and a very poor net promoter score would be 1.

These numerical values allow you to quantitatively compare your customers based on brand loyalty:

image (E0C2057A-77AB-4372-91B3-039DCC0EE554).png

You can then segment customers into categories based on their responses:

    1. A score of 9 or 10 indicates that this customer is a Promoter. They have high brand loyalty, feel certain that they would recommend the brand, and are likely to be successful customers.

    2. A score of 7 or 8 indicates that this customer is Passive. They like the brand and would probably recommend it, but they might convey hesitation and have some qualms.

    3. A score of 6 or below indicates that this customer is a Detractor. They may spread negative things about your brand to friends and colleagues. They're not likely to be successful customers and are likely to churn.

To calculate a brand's cumulative net promoter score, find the net promoter scores of a large sample size of customers. Then assign Promoters a value of +33, Passive customers a value of 0, and Detractors a value of -33. Sum the values of detractors, and subtract it from the sum of values of the Promoters.

image (926CD852-DDAE-4394-BA3A-92AC9CAB2E18).png

A brand that has all promoters will have a cumulative score of +100. A brand that has all detractors will have a cumulative score of -100.


Why is a net promoter score useful?

Net promoter scores are straightforward to calculate, allow you to learn more about customer segments, and help you to identify and replicate successful customers:

    • Scores require very little effort from the customers while provide your team with valuable information. You can continue to survey your customers over time without making them feel obliged to repeat a difficult or time-consuming task.

    • Scores are quantitative and are therefore useful for tracking and measuring customer opinions. Since customers' loyalty and perceived brand value can change over time, measuring and tracking net promoter scores are a good way to keep your finger on the pulse. You can chart net promoter score changes over time, segment scores by pricing tier, buyer persona, customer location, et cetera.

    • Scores will help you identify the customers that are most loyal so you can target these customers for plan expansions, promotions, and referral programs.

    • Scores will allow you to find patterns within the data on your customers about which customer qualities correlate with brand loyalty so you can replicate these customers' successes.

Finding customers' net promoter score is also a useful process because it sets a precedent for customer communication. You can take it one step further to learn more about how customers view the core value of your product (which affects brand perception) by asking:

    • If you had to convince your boss why your company should purchase this product or service, what would you say to persuade them?

This helps you understand the perceived value propositions of both good brand ambassadors and poor brand ambassadors.

Read more about net promoter scores and perceived value here.


Why are loyal customers profitable?

Understanding which customers are the most loyal—through net promoter score calculations—can have direct impact on your bottom-line revenue.

SaaS companies looking to grow need to optimize their recurring revenue in order to recover customer acquisition costs and generate profit that can be poured back into expanding and improving the company.

Monetizing existing customers is highly contingent on customer success. If you measure net promoter scores and work to improve the customer experience and brand loyalty of customers with low scores, you stand to create happier customers that are more likely to retain and expand their plans.

A high percentage of expansion revenue is correlated with a high LTV:CAC ratio—an indicator of SaaS company profitability. Customers with 5:1 LTV ratios or greater had a median of 30% of total revenue coming from expansion revenue.

image (5BFCB62A-DC9F-4960-9269-12BBF310E8D2).png

Upselling your current customers is essential to growing revenue. You should aim for expansion revenue to comprise about 30% of your total revenue. Tracking net promoter score and focusing on creating more loyal customers can help you increase expansion revenue and reach these goals.

Additionally, loyal customers that will promote your brand generate secondary revenue through referrals. The value of the revenue they bring in from other customers might actually double their LTV that you calculate through direct revenue contributions alone. This means that customers willing to promote your brand have a much higher monetary value than you might first calculate.

Read more about strengthening your marketing platform with loyal customers here.


What are the problems with net promoter scores?

Net promoter scores quantify your customer's loyalty, but they don't tell you what makes a loyal customer.

In order to take action on your the net promoter scores you calculate, you need to communicate with your customers. You can't create loyal customers if you don't connect with them on a human level.

In an earlier age of the SaaS industry when cloud solutions were a novelty, companies could get away with making customers happy by just providing them with a product. But in the current oversaturated SaaS market, there are so many solutions available that successful companies have to sell more than just a product. They have to sell a customer experience that will make a customer choose that company over the competition.

In such a competitive market, referrals from loyal customers are even more important. These referrals direct potential customers in your market to your product, even in the midst of similar competing solutions.

In this new era of SaaS, the companies that own the customer relationship are the companies that will get ahead. Net promoter score points you to a starting point for building great customer relationships, but these scores aren't the whole picture.

To understand why promoters find value in your brand, ask them questions like:

    • What problem does this product best solve for your team?

    • What customer service experiences have stood out to you?

    • What appeals to you most about this brand?

To understand why detractors aren't finding value, ask them questions like:

    • How could this product provide more value to your team?

    • How were you solving this problem before you tried our product?

    • How could our brand improve to better connect with customers?

The answers to these questions will provide you with actionable advice to build better customer relationships and create more loyal customers.

Read more about communicating with customers and forming better customer relationships here.

By Patrick Campbell

Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.

Subscription market insights you won't find anywhere else.