Using NPS® to improve your financial metrics

TLDR: For many, Net Promoter Score (NPS®) is a religion of sorts, the “one metric” to explain it all. But the real value of NPS is using it to improve key performance indicators.

First, let’s review which business metrics can be affected by NPS.  Then we’ll explore how to use NPS to drive improvements in those metrics.

Metrics that NPS can help you improve

  • Lifetime value (LTV): Loyal customers stay around longer, and buy more from you over time. LTV is comprised of:
    • Retention rate: Loyal customers stay around longer
    • Average revenue per user / customer (ARPU): Loyal customers buy more from you over time
  • Customer acquisition cost (CAC): Loyal customers refer their friends to you, which is an efficient way to acquire new customers

In a prior blog, I did a quick math exercise to illustrate how much more valuable a proponent can be across these metrics. Here’s a simplified illustration of the math.

Promoters stay around longer and are more likely to buy more from you. They will also tell others about the great services/products you deliver to them. The revenue you gain might look like this:

  • First Year value / first purchase: $100
  • Second Year value / repeat purchases or renewals: $100
  • Up-sells / cross-sells to a new plan mid-way through Year Two: $50
  • Year Three revenue: $150
  • Referrals to three other new customers: $300
  • Total 3-year revenue: $650

Passives might stay around for a while, but it’s unlikely they will be up-sold or refer others. Revenue will probably be this:

  • First Year value / first purchase: $100
  • Second Year value / repeat purchases or renewals: $100
  • Year Three revenue: $100
  • Total 3-year revenue: $300

Detractors are worth way less, and might even end up costing you:

  • First Year value / first purchase: $100
  • Second Year value / downgrade: $100
  • Third Year value / cancellation: $0
  • Wrote bad review which is read by another customer who decides to not purchase from you: -$100
  • Total 3-year revenue: $100

Improving Lifetime Value (LTV)

Since the two main elements of LTV are Retention Rate and Average Revenue per User, let’s review those in detail.

Improving Retention Rate

The feedback you gather from NPS surveys should be used to improve your product and services. Therefore, improved NPS scores and improved Retention Rate should be highly correlated.

Here’s an exercise to confirm the correlation. Try creating a chart with the X-axis as a time period of 12-18 months. Create two Y-axes, one for NPS scores and one for retention rate. These Y-axis values should move together over the period. Or, improving NPS scores should see improved Retention Rates in the 3-6 months that follow.

Improving Average Revenue per User (ARPU)

Improved NPS can improve ARPU because loyal customers are inclined to buy more over time. They can be up-sold and cross-sold into higher revenue offerings with each passing year.

Isolating this effect can be hard because other factors influence the global ARPU, such as pricing and discounting practices at the time of acquisition. To isolate the relationship between NPS and ARPU, calculate the second and third year revenue coming from your proponent segment. It should increase year over year.

Improving Customer Acquisition Cost (CAC)

Creating more promoters creates more advocates for your brand. By referring friends to you, your promoters reduce your customer acquisition cost.

NPS can be used in another way to reduce CAC. The exercise is to understand the segments from which your loyal customers came, and focus your acquisition efforts on those high-value segments. Meanwhile, you can reduce acquisition efforts on less valuable segments.

A typical segmentation exercise would evaluate NPS by these dimensions:

  • Channel. Which channels produced the best customers?
  • Tier. Are business customers of a certain size more loyal? For example, perhaps you satisfy small enterprises better than large ones?
  • Vertical. Do loyal customers come from certain industries and not others?
  • Geography. From which regions do the best customers come? Is there something about your product or service that is less satisfying in other regions?
  • Product offerings. Do some product editions produce the best customers?

Once you know your most valuable segments, you can optimize your sales and marketing resources to focus on acquiring those types of customers.

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