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Demystifying Net Promoter Score (NPS) for SaaS Founders

The Net Promoter Score (NPS) has become an essential metric, providing crucial insights into customer satisfaction and loyalty. In this article, we will explore what the NPS is, why it matters, and how to effectively implement it into your growth strategy.

Understanding Net Promoter Score (NPS)

Developed by Fred Reichheld, a loyalty expert and Bain & Company consultant, the NPS is a simple yet powerful customer feedback metric. The NPS quantifies the customers' loyalty to your brand, putting all your customers into distinct categories based on the likelihood they will recommend your product to others.

The NPS is calculated by asking customers one simple question on a scale of 0 to 10: "How likely are you to recommend our product or service to a friend or colleague?". In this way, it allows you to directly measure customer sentiment about your brand rather than relying on secondary sources, such as revenue or churn.

Based on their responses, customers are segmented into three categories.

  1. Promoters (9-10): Loyal enthusiasts who spread positive word of mouth and fuel your growth.

  2. Passives (7-8): Satisfied but unenthusiastic customers who might be swayed by the competition.

  3. Detractors (0-6): Unhappy customers who can potentially damage your brand and impede growth.

Your NPS score can range from -100 (all detractors) to 100 (all promoters). To calculate your NPS, subtract the percentage of detractors from the percentage of promoters:

NPS = (% of Promoters) - (% of Detractors)

You can also use NPS to measure satisfaction with a specific product, service, or segment within your business. Alternatively, you can use it to gauge employee satisfaction and engagement at your company.

NPS Example

Here’s a simple example to better understand this. Let’s say you reached out to 100 customers. After collecting their survey responses, you found that 10% were Detractors, 30% were Passives, and 60% were Promoters. After putting aside the Passives, you’d subtract the Detractors from the Promoters to get an overall NPS score of 50. Here’s how that looks laid out:

60% Promoters - 10% Detractors = 50 NPS

What if the ratio is completely different? Let’s change these numbers so that you now have 80% Detractors, 10% Passives, and 10% Promoters. This would give you a much worse NPS score of -70. This would look like:

10% Promoters - 80% Detractors = -70 NPS

Why Is Net Promoter Score Important?

When it comes to measuring business health and developing strategies for improvement, there’s a reason over two-thirds of Fortune 1000 companies rely on NPS. It remains one of the best metrics for gauging customer loyalty, identifying pain points, and coming up with effective ways to promote your business.

You Can Gauge Customer Loyalty

By going directly to the customer, NPS is an excellent tool for measuring how loyal they are (or how likely they are to churn) at any point in time. But, as with most metrics, the true value of this is not in any one measurement, but in how your score changes as you track it over time.

Looking at how your percentage of Promoters, Passives, and Detractors changes over weeks, months, or even years can give you vital clues to how well you are serving your customers. If Detractors are decreasing while Passives are increasing, this would indicate that customer satisfaction is trending upwards. Likewise, if Passives are increasing but Promoters are falling, this would mean something about your product or brand isn’t working.

You Can Identify Pain Points

No business wants to receive low NPS numbers. However, the upside of this is that using NPS makes it easier to pinpoint what customers don’t like.

Because you’re reaching out to individual unhappy customers, NPS gives you the opportunity to ask them directly what is and is not working for them. You can approach this in several ways. Perhaps you want to focus on the unhappiest customers – those who scored you a 0 or 1 – in order to fix what may potentially be the most serious problems. Or you may want to ask follow-up questions to customers who answered a 5 or 6, as they are most likely to become Passives or even Promoters.

Alternatively, as mentioned above, you could simply include a space for qualitative feedback in order to capture as many customer experience pain points as possible.

You Can More Effectively Promote Your Business

Just as Detractors provide you with an additional opportunity, so do Promoters. By separating who are your happiest and most enthusiastic customers, NPS makes it easier to reach out to them to recommend your business.

This is called referral marketing, and it can be very effective. Consumers listen to recommendations from friends and colleagues much more than they do to typical marketing. In fact, 67% of respondents say they are more likely to purchase a product if it is promoted by someone they know. You can use this to your advantage by asking your Promoters to submit online reviews, take part in case studies, or share their experiences with your brand. By giving them an additional incentive to do this, such as a discount or free service, you could further increase the likelihood of your happiest customers getting heard.

What Is a Good NPS?

Obviously, the higher the NPS score, the better off your business. But since no company is ever likely to please all of their customers, what is a good, but realistic, NPS score? There are a few benchmarks you can use depending on your preferences.

General NPS Benchmark

In this broad definition, anything above 0 on the -100 to 100 NPS scale is considered “good.” This means that a majority of your customers have a positive view of your company and are likely to recommend it – or at least not disparage it. A score of 50 or more is considered “excellent,” while 70 or above would be “world-class.” Some companies that have achieved this status (as of 2022) include Tesla (97), Starbucks (77), and Amazon (73).

Competitive NPS Benchmark

You can also measure your NPS against other companies within your industry. This can provide more strategic value since some industries have a higher NPS average than others. For example, the ecommerce industry has an NPS average of 62, while the healthcare industry has an NPS average of 38. In order to get the most useful comparison, you’ll only want to measure your NPS score against other companies within your same industry.

Self-Assessment NPS Benchmark

Because there are potentially too many variables to make an even comparison between companies in the same industry, the most effective way to determine the quality of your NPS score is to measure it against your past scores. In this benchmark, a good NPS score is one that is better than the rest. Your goal should be to continually trend upward. This would be a sign that your product is working, you are engaging your customers, and you are creating organic, sustainable growth.

Implementing NPS

To get the most out of NPS, consider the following best practices to ensure high-quality feedback and valuable insights:

  1. Timing and Frequency: Select the optimal time to ask your customers for their NPS ratings. This could be after key milestones or interactions with your product or support team. Regularly measure NPS to track changes, but avoid overwhelming your customers with too many surveys.

  2. Respond to Customer Feedback: Show your customers you appreciate their feedback by acknowledging their comments and acting on their concerns. This creates a virtuous cycle of loyal customers who feel heard and valued.

  3. Close the Loop with Detractors: Reach out to detractors to better understand the root cause of their dissatisfaction. This proactive approach provides opportunities to address their concerns, increase customer satisfaction, and potentially transform detractors into promoters.

  4. Harness the Power of Promoters: Identify and engage with your promoters to nurture strong relationships. Encourage them to refer your product to others, and provide incentives for doing so.

  5. Utilize NPS Data to Drive Product Development: Use the insights you receive from NPS surveys to prioritize product improvements and invest resources in features that will make a real difference to your customers.

  6. Couple it with qualitative feedback: A Detractor who rates you a 0 likely has much different feelings than one who rates you a 6. This is why it is important to collect qualitative feedback as well. You can do this by leaving room for open-ended questions that explore the subjective reasons behind the quantitative score like "Why did you give this score?" or "What do you like most about our product/brand?"

Common NPS questions

Can NPS predict customer churn in my SaaS business?

While the NPS may not directly predict churn, it serves as an early warning sign of issues that could lead to customer dissatisfaction and eventual churn.

Is NPS the only metric I need for my SaaS business?

NPS is a powerful but single-dimension metric. Consider combining it with other metrics like Customer Lifetime Value (CLTV), Monthly Recurring Revenue (MRR), and Customer Acquisition Cost (CAC) to get a comprehensive understanding of your business performance.

How often should I run NPS surveys?

The ideal frequency depends on your customer interaction volume and business objectives. Generally, conducting NPS surveys at least every quarter or after significant product updates can provide meaningful insights.

Do competitor NPS scores matter?

Comparing your NPS to competitors' scores gives a broader context to evaluate your performance. However, focus on improving your score rather than just meeting or overtaking competitors.

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