Entrepreneurs: Here's What You Need to Know About Your Company's 'Net Promoter Score' NPS is crucial to understanding the health of your business when you ask customers "the most important question of all."

By Andrew Medal

Opinions expressed by Entrepreneur contributors are their own.

NPS . . . No, it's not some acronym for an entrepreneurial disease. Instead, it means "net promoter score." And it's an important measure that emerges when you ask your customers the most important question of all. Can you figure out what that would be?

Related: CSAT And The Art Of Keeping Customers Happy

You probably can because, believe it or not, there is actually broad consensus within the business community about what that question should be: Fred Reichheld, the Bain & Co. executive who created the NPS concept, has said that 66 percent of Fortune 1000 company promoters ask this question. And they say that the response they get is crucial to understanding the health of their business.

Esentially, it comes down to this: "Would you recommend our product or service to a friend?"

By answering this question with a "yes" or "no" or providing a number, 1 to 10, on a sliding scale, customers indicate whether they would promote your business to other people. In a nutshell, that is how you know whether your company is on track to grow or shrink. Responses to that question create that net promoter scale, or NPS.

If you've heard of NPS, but aren't too familiar with it, it's been around since 2003, as a management tool used to gauge customer loyalty. Typically, customers receive an email asking for their participation in a one-question survey. More spam in my inbox? they think. No thank you. Considering that the average email inbox receives 121 emails per day, it's no wonder that the average survey response rate is just over 3 percent.

Despite that small percentage, NPS can be a great baseline for evaluation. And, when it's executed correctly -- such as through an "in-app" questionnaire -- it can be so much more valuable than an anonymous query. In other words, we have just begun to scratch the surface of extracting value from this data point.

What entrepreneurs need to know about NPS.

Tracking your company's NPS does not automatically change anything in your company. Instead, you have to make it important. There has to be a company culture aligned with customer feedback on that question.

If it is important to you and to your team that customers refer your business, then the NPS will mean something. The data can come alive, rallying people in disparate departments to achieve the same goal: an outstanding customer experience.

"Business leaders should use NPS as a rallying cry for customer loyalty," Todd Olson, an expert on the future of NPS and CEO of Pendo, told me. "NPS provides an opportunity to align an entire company with customer success. Having clients who won't recommend you will ultimately be an anchor [weighing down] your business.

Related: Want Loyal Customers? Prioritize Your Customer Service With These 4 Tactics.

"Don't stop at your employees," Olson advised. "Hold yourself accountable. Share the number with your board and make it a topic, at that level. Ultimately, great companies have high loyalty."

What product managers need to know about NPS.

Product managers are on the front lines of creating loyal, happy customers. In order to tweak and refine whatever it is that they offer, product managers can meet customer expectations by using tools to make their NPS metrics tangible. That means understanding who their customers are who had positive experiences and who the customers are who had negative ones.

From there, product managers can work backward to figure out what went right or wrong in their customers' journey. This process results in specific insights that inform specific actions to improve the NPS.

"Product managers need to own NPS," said Olson. "Of course, NPS by itself isn't enough to have an impact; product teams need to combine NPS with other data to understand the 'why' and 'how.' Then, product managers need to prioritize the engineering work that will address the key concerns learned by measuring it."

NPS as a tool, then, is most effective when product managers make it their own and constantly seek out ways to make the data it produces more rich and meaningful.

How to put NPS into context.

"I have some reservations about using only the net promoter score, which is intended as a predictor of customer loyalty," analyst Roy Atkinson has explained. "It requires us to remove 'passives' [people who don't take the NPS survey] -- and I believe that these are the very people we should be talking to, to find out why we were not quite good enough.Their feedback can be very valuable."

Atkinson is right in asserting that it can be misleading to gauge customer satisfaction based on a single number that represents only a small portion of a company's customers. Olson, meanwhile, emphasized that NPS should be measured with a customer satisfaction score (CSAT), an overall satisfaction score (OSAT), a (customer) effort score and a customer lifetime value. These scores, together with NPS, provide a more holistic understanding of the customer experience.

CSAT = Customer satisfaction score

OSAT = Overall satisfaction score

Effort score = Ease of use

Customer lifetime value = total value of customers

Related: 5 Surefire Ways to Improve Your Site's Online Reviews

By triangulating this metric within other related data points, a product manager will be able to see his or her company's customer experience for what it is: integral to the growth of the company. From that point, it won't take long to see fluctuations in NPS cascading into other categories, for better or for worse.

Wavy Line
Andrew Medal

Entrepreneur Leadership Network Writer

Entrepreneur & Angel Investor

Andrew Medal is the founder of The Paper Chase, which is a bi-weekly newsletter. He is an entrepreneur and angel investor.

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