Experimenting with Net Promoter Score (NPS 3.0).

NPS 3.0 More Blah Blah Blah or a Metric That Matters for Purpose Driven ScaleUps?

Let’s talk about Net Promoter Score (NPS). NPS is a customer satisfaction and loyalty measurement tool that is used by companies to gauge the likelihood that their customers will recommend their products or services to others. It is based on the premise that customers who are highly satisfied with a company's products or services are more likely to recommend them to others. NPS 3.0 is an updated version of the NPS measurement tool that includes additional features and functionality, the essence of NPS 3.0 is to remove any fluffy blah blah blah of NPS with stats that measure the impact of NPS on financials.

To leverage NPS 3.0, companies can follow these steps and use NPS 3.0 to measure and improve customer satisfaction and loyalty:

1.??????????Determine your NPS target: Set a target NPS score based on your company goals and industry benchmarks.

2.??????????Survey your customers: Use a survey tool to ask your customers the NPS question: "On a scale of 0 to 10, how likely are you to recommend our product or service to a friend or colleague?"

3.??????????Analyse and segment your results: Divide your customers into three groups based on their responses: promoters (9-10), passives (7-8), and detractors (0-6).

4.??????????Follow up with promoters and detractors: Contact promoters to thank them and ask for their feedback and ideas. Contact detractors to understand their issues and try to resolve them.

5.??????????Use NPS data to drive company improvements: Use the insights gained from the survey to identify areas for improvement and make changes to your products or services.

6.??????????Track and monitor your NPS over time: Regularly (not annually, or quarterly…engaged humans connect frequently, if they don’t want to what’s that telling you!!) measure and track your NPS to see how it changes over time and to identify trends and patterns.

But does it work? As my friend and colleague Arie Van Bennekum says ‘a fool with a tool is still a fool’, and NPS is a tool in the hands of many a fool, it is often deployed without any knowledge and little understanding and thus becomes easily falsified, and manipulated (are bonuses linked to NPS? Eeek!!! WTF!!). No wonder bad decisions are made. Said this, there is evidence to suggest that NPS can be a useful tool for helping companies scale.

NPS is a measure of customer satisfaction and loyalty, and companies with high NPS scores tend to have higher customer retention rates and lower customer acquisition costs. This can help companies save money and grow more efficiently, as they are able to retain a higher percentage of their existing customer base and acquire new customers through positive word-of-mouth and referrals.

However, it's important to note that NPS is just one metric and should not be used in isolation, aka that ‘balanced scorecard thingamajig’ Companies should also consider other factors, such as customer lifetime value, customer retention rates, and customer acquisition costs, when evaluating the effectiveness of their growth strategies.

Additionally, it's important for companies to act on the insights gained from NPS surveys and make improvements to their products or services to drive growth. By doing so, companies can use NPS 3.0 to measure and improve customer satisfaction and loyalty and potentially contribute to the company's growth. How many companies that adopt NPS forget to ask the critical second question? Fools with Tools? No second question? No deep analysis of that second question? Then you are obviously in a company that is industrial aged not digital aged because it does not give a flying f*** of what the customers are saying, obviously feedback is less important than the score. In these companies NPS is a total waste of time, in fact it becomes extremely dangerous as blind spots may be missed. How on earth can employees determine what to do if they lack this kind of information. Progressive companies working towards an empowered self-managing workforce will lose momentum if the value they are creating is not in sync with the value their customers seek. n'est pas?

?The formula for calculating NPS is:

NPS = (% of promoters) - (% of detractors)

To calculate NPS, companies survey their customers and ask them the NPS question: "On a scale of 0 to 10, how likely are you to recommend our product or service to a friend or colleague?" Customers who respond with a 9 or 10 are considered promoters, those who respond with a 7 or 8 are considered passives, and those who respond with a 0 to 6 are considered detractors.

?To calculate NPS, companies first determine the percentage of promoters, passives, and detractors among their customers. For example, if a company has 100 customers and 30 are promoters, 50 are passives, and 20 are detractors, the NPS would be calculated as follows:

NPS = (30% promoters) - (20% detractors) = 10%

?So, in this case, the company would have an NPS of 10. NPS scores can range from -100 to 100, with scores above 0 considered positive and scores below 0 considered negative.

In NPS 3.0 the math gets more specific on measuring the impact of retaining clients, the new measure is called earned growth rate, it is designed to measure the revenue growth generated by returning customers and their referrals. A related statistic, the earned growth ratio, is the ratio of earned growth to total growth.

What is earned growth? Earned Growth is the increase in a company's customer base that is attributed to positive word-of-mouth and referrals from existing customers. In NPS 3.0, earned growth is calculated by multiplying the percentage of promoters (customers who score the company a 9 or 10 on the NPS scale) by the average customer lifetime value (CLV).

The formula for calculating earned growth in NPS 3.0:

Earned growth = (% of promoters) * (average CLV)

?To calculate earned growth, companies first need to determine the percentage of promoters among their customers. This can be done by surveying customers and asking them the NPS question: "On a scale of 0 to 10, how likely are you to recommend our product or service to a friend or colleague?" Customers who respond with a 9 or 10 are considered promoters.

The next step is to calculate the average CLV for the company. CLV is the estimated revenue that a customer will generate for the company over the course of their relationship with the company. It can be calculated by dividing the total value of a customer's purchases by the number of years they are expected to remain a customer. At the end of this article we will briefly consider pitfalls of miscalculating CLV, as it is an Achilles heal to NPS 3.0 is you are not expert with CLV.

Once the percentage of promoters and the average CLV have been determined, earned growth can be calculated by multiplying these two values together. For example, if a company has an NPS of 50% and an average CLV of $1,000, the earned growth would be calculated as follows:

Earned growth = (50% promoters) * ($1,000 CLV) = $500

?This means that for every promoter the company has, it can expect to generate an additional $500 in revenue through positive word-of-mouth and referrals. By tracking and monitoring earned growth over time, companies can measure the impact of their NPS efforts on customer acquisition and revenue growth.

Within this new measure are two interesting components.

Net revenue retention (NRR) is a metric that measures the percentage of revenue that a company retains from its existing customer base over a given period. In NPS 3.0, NRR can be used to measure the impact of customer satisfaction and loyalty on a company's revenue growth.

?To calculate NRR in NPS 3.0, companies need to follow these steps:

1.?????Determine the percentage of promoters, passives, and detractors among your customers. This can be done by surveying customers and asking them the NPS question.

2.?????Calculate the average revenue per customer (ARPC) for each group. This can be done by dividing the total revenue generated by each group of customers by the number of customers in that group.

3.?????Calculate NRR for each group. To calculate NRR for promoters, subtract the ARPC for detractors from the ARPC for promoters and divide the result by the ARPC for promoters. To calculate NRR for passives, subtract the ARPC for detractors from the ARPC for passives and divide the result by the ARPC for passives.

4.?????Calculate overall NRR by weighting the NRR for each group by the percentage of customers in that group.

?For example, if a company has 100 customers, 30 are promoters, 50 are passives, and 20 are detractors, and the ARPC for promoters is $1,000, the ARPC for passives is $500, and the ARPC for detractors is $100, the NRR for promoters would be calculated as follows:

1.?????NRR for promoters = ($1,000 ARPC for promoters - $100 ARPC for detractors) / $1,000 ARPC for promoters = 90%

2.?????The NRR for passives would be calculated in a similar manner:

3.?????NRR for passives = ($500 ARPC for passives - $100 ARPC for detractors) / $500 ARPC for passives = 80%

?To calculate overall #nrr , the NRR for each group would be weighted by the percentage of customers in that group:

?Overall NRR = (30% promoters * 90% NRR for promoters) + (50% passives * 80% NRR for passives) = 84%

?In this example, the overall NRR for the company would be 84%. By tracking and monitoring NRR over time, companies can measure the impact of customer satisfaction and loyalty on their revenue growth.

?The second component earned new customers (ENC) is a metric that measures the number of new customers that a company acquires through positive word-of-mouth and referrals from its existing customer base. In NPS 3.0, #ENC can be used to measure the impact of customer satisfaction and loyalty on a company's customer acquisition efforts.

To calculate ENC in NPS 3.0, companies need to follow these steps:

1.?????Determine the percentage of promoters among your customers. This can be done by surveying customers and asking them the NPS question.?

2.?????Calculate the average number of referrals made by promoters. This can be done by asking promoters how many people they have recommended the company to and dividing the total number of referrals by the number of promoters.

3.?????Calculate the conversion rate for referrals. This can be done by dividing the number of new customers acquired through referrals by the total number of referrals made.

4.?????Calculate ENC by multiplying the percentage of promoters by the average number of referrals made by promoters and the conversion rate for referrals.

?For example, if a company has 100 customers, 30 are promoters, and the average number of referrals made by promoters is 2, with a conversion rate of 20%, the ENC would be calculated as follows:

?ENC = (30% promoters) * (2 referrals per promoter) * (20% conversion rate) = 0.12 or 12 new customers

In this example, the company would acquire an additional 12 new customers through positive word-of-mouth and referrals from its existing customer base. By tracking and monitoring ENC over time, companies can measure the impact of customer satisfaction and loyalty on their customer acquisition efforts.

?

Pitfalls of NPS 3.0.

There are several common pitfalls that companies should be aware of when using NPS 3.0.

1.?????Relying on NPS alone: NPS is a useful tool, but it should not be the only measure of customer satisfaction and loyalty. It's important to also consider other metrics, such as customer retention and customer lifetime value, to get a complete picture of customer satisfaction and loyalty.

2.?????Not following up with detractors: It's important to follow up with detractors to understand their issues and try to resolve them. If companies don't follow up with detractors, they may miss out on valuable feedback and opportunities to improve their products or services.

3.?????Not acting on feedback: Collecting feedback is only useful if companies take action on it. It's important to analyse the feedback received from NPS surveys and use it to make improvements to the company.

4.?????Not regularly measuring and tracking NPS: NPS should be measured and tracked on a regular basis to identify trends and patterns and to see how it changes over time. If companies don't regularly measure and track NPS, they may miss out on valuable insights and opportunities for improvement.

5.?????Not having a plan for improving NPS: It's important to have a plan in place for improving NPS. This may involve making changes to products or services, improving customer service, or implementing new processes or systems.

Of course, the greatest pitfall of all is not having a true grasp for performance measures. Stacey Barr is the guru of performance measures, and you would do well following her 12-point checklist at the very least when choosing your company's performance measures. After all, choosing something that does not help you find your way effectively to delivering your strategic imperatives would be a crime in itself! The checklist:

1. ?Is easily understood by all stakeholders/ or well explained?????????
2. Has a clear and direct ‘line of sight’ to a Strategic Goal or OKR ?????????
3. KISS, not an abstract index of multiple measures ??????
4. Has an owner, someone who'll take actions in response to its trends ???????
5. Has at least one strong link to at least one other 'parent ' measure
6. Is objective evidence of its area of performance???
7. Provides regular feedback over time i.e. it is not an action or event or milestone to be reached ?????????
8. Is cost effective to measure ?
9. Drives ‘performance improving’ behaviour??
10. Is used and valued in decision taking ???????
11. Has no known & unmanageable unintended consequences,?i.e. if the result or outcome it is measuring improves, it doesn’t cause another result or outcome to get worse???????
12. Is fully defined, has a functional spec detailing its meaning, intent, relationships to other measures, calculation, data requirements, reporting requirements?

By avoiding these pitfalls, companies can maximize the value of NPS 3.0 and use it effectively to measure and improve customer satisfaction and loyalty.

?Customer Lifetime Value...eeeeek!!! how many companies I have coached that hit a wall when it comes to calculating Customer Lifetime Value. By following these steps, companies can avoid miscalculating CLV and ensure that they are accurately measuring and tracking the value of their customer relationships.

1.?????Use accurate data: CLV is calculated using data on customer purchases and the expected length of the customer relationship with the business. It's important to use accurate data when calculating CLV to ensure that the resulting value is accurate and representative.

2.?????Consider the entire customer relationship: CLV should include all revenue generated by the customer over the entire course of their relationship with the business, not just the initial purchase.

3.?????Account for customer churn: CLV should take into account the likelihood that a customer will churn or stop doing business with the company. This can be done by including an estimate of the percentage of customers who are expected to churn in the calculation.

4.?????Use a proven formula: There are several different formulas for calculating CLV, and it's important to use a proven and accurate formula to ensure that the resulting value is accurate and representative.

So, with this in mind what experiment could you run next?

If you are new to NPS3.0 then here are some ideas to get you started. Remember the key to everything in the post-industrial company is through experimentation and what we refer to as evidence-based management (more on this at a later date). For now… here are several steps that a company can follow to experiment with NPS 3.0:

1. ?Determine your NPS target: Set a target NPS score based on your business goals and industry benchmarks.
2. ?Survey your customers: Use a survey tool to ask your customers the NPS question: "On a scale of 0 to 10, how likely are you to recommend our product or service to a friend or colleague?"
3. ?Analyse and segment your results: Divide your customers into three groups based on their responses: promoters (9-10), passives (7-8), and detractors (0-6).
4. ?Follow up with promoters and detractors: Contact promoters to thank them and ask for their feedback and ideas. Contact detractors to understand their issues and try to resolve them.
5. ?Use the insights gained from the survey to identify areas for improvement and make changes to your products or services. Implement changes to your products or services, customer service, or processes and systems and see how they impact NPS. I’d expect one OKR every quarter based on that second question and the insights you have gained from NPS.
6. ?Track and monitor your NPS over time: Regularly measure and track your NPS to see how it changes over time and to identify trends and patterns.

On testing...and deploying NPS.

Test different approaches to improving NPS: ?

1. Tactical NPS refers to the use of NPS to address immediate issues and concerns within a company, such as improving customer service or addressing specific product or service issues eg step 3 on the onboarding process sucks! Tactical NPS is focused on making short-term improvements that have a direct and immediate impact on customer satisfaction and loyalty.
2. Strategic NPS refers to the use of NPS to inform long-term business strategy and decision-making. This can include using NPS to guide product development, identify new business opportunities, and optimize marketing and sales efforts. Strategic NPS is focused on using customer feedback to drive long-term business growth and success.

Both tactical and strategic NPS can be valuable for businesses, but it's important to strike a balance between the two. Too much emphasis on tactical NPS can lead to a focus on short-term fixes rather than long-term growth, while too much emphasis on strategic NPS can result in a lack of focus on immediate customer needs and concerns. By considering both tactical and strategic NPS, businesses can address immediate issues and concerns while also considering the long-term impact of their actions on customer satisfaction and loyalty.

?Lastly, remember Arie van Bennekum ’s advice..a fool?with a tool is still a fool,

So keep in mind that NPS is just one measure and should be considered in conjunction with other measures of customer satisfaction and loyalty, such as customer retention and customer lifetime value as well as knowing its place on the CEO Strategic Dashboard as you transform to a progressive digital aged company.

?There are obviously gaps in my knowledge, so if I am missing anything feel free to add to this so we can improve. HYPE what says you?

#scaleups #NPS #OKRs #agilescaleup #scalingup #leadership #customervalue #agile #customeraquisitioncost