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Here is the complete guide on Net Promoter Score for SaaS businesses
Ever since Marc Andreessen coined the phrase “Software is eating the world!” in his famous WSJ article back in 2011, software has eaten up more of the world than ever imagined. Research claims that there are well over 21 million software developers in the world. While that number looks small, the software market is definitely one of the biggest in the world. It is hard to find people who are not consuming software in some form or the other. The most common form of software consumption is mobile apps. The chart below shows that the annual app download would be over 250 billion by 2022!
As massive as the software consumer base is, the economic value of that consumer base is equally large. By 2022, the worldwide consumer spending on mobile apps will be well over $150 billion.
Along with the direct consumer spending, businesses invest considerably in software to optimise and automate their business processes. With the advent of Software-as-a-Service (SaaS), the number of business users of softwares has jumped to new a level. The total number of worldwide SaaS users has increased by 50% in the last 5 years from 2013 to 2018. Currently, there are close to 4 billion SaaS users around the world.
What does this mean to a SaaS business?
Well, there was a time when software was only accessible to elite professionals and large investment in training users was required to optimally utilise a business software. However, today, software is easily accessible to all and people already have an above average understanding of how softwares work. Because of commoditisation of apps, people are now well trained to use software. In fact, users have now developed sophisticated expectations of a certain level of usability and experience from softwares.
This has put a SaaS business in a tough spot because it is not just competing with other SaaS products but is competing with consumer experience with just about any other app out there. This means that SaaS businesses must deliver exceptional customer experience to meet user expectation and build loyalty. This is where the Net Promoter Score (NPS) comes. NPS helps measure, monitor, and improve the customer experience of a SaaS product. In this article, I will give you a detailed explanation of what NPS is, why it makes business sense to start using NPS, how other SaaS businesses are using NPS, and what are some common mistakes to avoid when implementing NPS.
Let’s get started with a quick introduction on Net Promoter Score.
What is the Net Promoter Score?
Net Promoter Score (NPS) is a management tool that is used by companies to determine their customers’ loyalty towards the brand or the products/services that they offer. NPS was developed by Fred Reichheld, Bain & Company, and Satmetrix. It was first introduced in Reichheld’s Harvard Business Review article, ‘The One Number You Need To Grow’.
In his book, ‘The Ultimate Question 2.0’, Fred mentions that he created this metric in order to “measure how well an organization treats the people whose lives it affects – how well it generates relationships worthy of loyalty.”
The NPS feedback survey is conducted by asking just one simple question:
On a scale of zero-to-ten, how likely is it that you would recommend us to a friend or colleague?
By recording responses to this question, the companies are able to gauge customers’ feelings and attitudes towards the brand.
To make the most of the NPS metric, this question should be followed up with this question:
What is the primary reason for your score?
The answers to this open-ended question enable the organization to understand the reasons for customers’ attitudes.
According to the NPS survey measured on a scale of 0 to 10, every company’s customers can be divided into three well-defined categories:
- Promoters are customers who rate the company a 9 or a 10.
- Passives are customers who rate the company a 7 or an 8.
- Detractors are customers who rate the company between 0 to 6.
NPS = % Promoters – % Detractors. This score could range from -100 to +100.
Each group of customers exhibits a distinct pattern of behavior as well as a distinct set of attitudes.
Promoters indicate that their lives have been enriched by the company, making them loyal enthusiasts. These customers would keep buying more from the brand and referring others, thus fueling organic growth.
Passives indicate that they got what they paid for, nothing more. Such customers are satisfied but unenthusiastic. They are likely to defect towards better offerings.
Detractors indicate that their lives have been diminished in doing business with the brand. These customers are highly dissatisfied, disaffected, even dismayed. These customers would bad-mouth the brand and detract people from buying, impeding growth and driving up costs.
Why must SaaS businesses pay attention to NPS?
The SaaS industry is one of the fastest growing ones today. Because SaaS software is delivered via cloud, it does not require heavy upfront IT infrastructure investment. Therefore, business managers prefer investing in SaaS products. Moreover, SaaS products are available on a monthly subscription model that does not require a long-term financial commitment for the user. SaaS can be easily accessed, has a smooth learning curve, and requires lower maintenance and support cost.
However, a SaaS business has to sustain upfront Customer Acquisition Cost (CAC). A typical CAC recovery graph for a SaaS business looks like this.
As the graph suggests, it takes a long time before a SaaS company can start making positive cash flow. Customer loyalty, therefore, is of prime importance in such a business model. SaaS products inherently need to retain customers to become profitable.
Since NPS “metricizes” customer loyalty, measuring NPS is extremely valuable in the SaaS industry.
For several years now, I have helped various organizations set up and implement NPS. I have closely observed how NPS can profoundly impact the growth of SaaS businesses. Here are a few ways in which NPS helps SaaS businesses.
NPS helps acquire new customers
By conducting NPS surveys, brands are able to identify and segregate promoters from other customers. Studies show that 88% of buyers are influenced in their buying decision by reviews. SaaS companies can use this opportunity and ask their promoters to refer the brand to their friends and colleagues. Companies could also invite these happy customers to leave a review on business review sites such as G2 Crowd, Capterra, and the like, or on social networking pages such as Facebook and LinkedIn.
This helps in spreading a positive word of mouth about the brand, making it easier to acquire new customers.
NPS reduces customer churn
Given that a typical SaaS client has an option to cancel its subscription at any time, the SaaS provider would be left with negative cumulative cash flow if the customer cancels before the CAC has been fully recovered. Thus, reducing customer churn is critical in a SaaS business.
NPS feedback enables SaaS businesses to identify detractors – paying customers who are unhappy and are at risk of canceling the subscription. Once at-risk customers are identified, SaaS companies have an opportunity to engage further and unearth the real reasons behind customer unhappiness. With this information, it becomes easier to fix issues, recover detractors, and reduce customer churn.
NPS increases profitability
A major part of the revenue for SaaS businesses is earned through ‘up-sells’. If the up-sell can be organically achieved, the cumulative cash flow would become positive sooner. This ensures a faster route to profitability for the SaaS provider.
It goes without saying that selling more to an existing customer is easier than selling to a new one. It is even easier to sell to a happy customer than to an unhappy customer. By tracking NPS, SaaS companies can identify promoters and utilize the opportunity to up-sell to them.
How are other SaaS companies doing it?
Mention is a real-time media monitoring tool that tracks web and social media updates of a brand. The management team at Mention wanted to comprehend the reasons for their customers’ behavior after their free trial expired. They had many questions – do customers like the product? If so, then why do they not upgrade? Why do they stop using the product? Why do they downgrade?
Guillaume set up a process where an NPS survey email is sent to customers a day after their free trial expires. Based on their responses, another set of personalized emails is sent to these customers. For instance, a discount in the paid upgrade is offered to promoters, an extended free trial is offered to passives, and a thank you note is sent to detractors.
The NPS survey helped Mention’s team gauge customers’ feelings and personalize messages based on their feelings. With this level of targeting audiences, Mention reduced customer churn rate by half!
In another instance, Maranda Ann Dziekonski, ex-VP Customer Operations at HelloSign, and Jennifer Ruth, Sr. Director of Customer Success at Optimizely, shared at a Customer Success Meetup in the San Fransisco Bay Area how their companies are measuring and acting on NPS.
HelloSign is an eSignature platform that allows its customers to send and receive electronically signed documents securely. Optimizely is an online experimentation platform that enables its customers in experimenting and testing digital customer experiences across websites, mobile apps, and connected devices.
Since NPS indicates how happy the customers are while availing the product/service, it holds everyone accountable for being customer-centric. It is also easy to identify behavioural traits of promoters vs detractors and be prepared to manage their expectations accordingly. Maranda says, “80% of your detractors are tweeting complaints on social media, 80% of your promoters are those who will contribute to expansion revenue.” Collecting NPS feedback also helps you understand how the customers feel so that you can engage with them in the right way.
Both Maranda and Jennifer suggest that customer-facing employees – customer success or customer service teams – must own the NPS closed-loop process. Employees from other departments, such as Marketing, Product, and the like, would not know the key step to delighting unhappy customers.
Both experts also agree that the surveys should not be conducted any more often than every six months. However, it is a good idea to survey a recently onboarded client to have a steady flow of NPS feedback that can help the organization in improving its product regularly.
In conclusion, these customer success leaders have emphasized on minimizing customers’ burden and empowering them while collecting and acting on their feedback.
Read more about it here.
How should you do it?
Close the loop on NPS feedback
The below diagram gives a representation of the four steps that are needed to close the loop on customer feedback.
Firstly, you must identify the touch points at which you’re capturing feedback from your customers. This is to ensure that you are listening to your customers’ feedback at the right steps.
Once you’ve captured the feedback, you must fix the customer complaints and provide a tactical solution. There are some issues that can be addressed promptly and do not require a large team or massive planning. So, you must focus on fixing these issues quickly. This provides you with an opportunity to score some quick wins.
Secondly, you must get to the root cause of customer dissatisfaction and understand the drivers of your customers’ satisfaction or dissatisfaction. This would entail analyzing the data. The analysis can be done by slicing and dicing the data or by deep-diving to some qualitative feedback that you have received. But, this essentially means putting your head around what your customers are saying about doing business with you. This must encompass all the feedback: the good, the bad and the ugly!
Thirdly, you must build an action plan for improving CX. This must include developing project plans and budget. That’s where looping in the stakeholders and inputs from senior management is critical. This allows you to get a buy-in from the senior management for these projects. Further, it helps to fix customer issues based on the understanding of customer experience being delivered.
Once you have defined the projects you need to drive to improve customer experience, showcased the ROI, and received approvals from the senior management, the final step is to implement the projects. To do so, you must identify the stakeholders and drive projects based on defined timelines. That’s a loop; it’s a continuous process. You’ve to continuously listen to the voice of the customer and evolve the experience you are delivering to your customers.
While the above process discusses how you can close the loop on your detractors, let’s look at how can you do the same for promoters.
Firstly, you must design the survey email, which must have the NPS question with the rating scale.
Step two is to capture the reason for the score. For promoters, the messaging could be: “Thanks a lot for your positive feedback.” However, for detractors, it could be: “We are sorry that we couldn’t meet your expectations. Please select the options below that best describe the reason for your score.”
Remember, promoters are those customers that have given you the rating of nine or ten. These are customers that are delighted about doing business with you and would recommend you to their friends and family. In today’s age, recommendations are driven massively by social media. An example of closing the loop on promoters is to ask them to recommend you on social media or third-party review website. You can also incentivize this process. I don’t recommend incentivizing the survey request itself because that would mean the customer is giving a feedback just for that incentive or a freebie. However, you can certainly encourage them to leave a response and subsequently offer a discount voucher or a coupon that they can offer their friends and family.
Achieve quick and easy wins with your NPS survey
Initiatives such as the NPS can yield maximum results when they become the DNA of the organization. In spite of all the advantages that NPS possesses, getting an organization-wide buy-in into this is not easy. So, nothing like a few quick and easy wins for the NPS program to help the cause. Here are a few tips to give you those quick and easy wins:
1. Focus on the low hanging fruits
The result of any NPS survey is to pick out the big, long-term initiatives that would drastically enhance the customer experience and loyalty. However, in the initial stages, it is also crucial to be on the lookout for some low hanging fruits. These could include a small change in the website, a change in the call center script, or any small win that could potentially affect your NPS score. This recommendation, followed up by a corresponding increase in NPS score, will give the employees a sense of progress and achievement.
Once there is such achievement, ensure the internal PR is strong enough to make all stakeholders aware of the win. If you are using a transactional NPS, such wins are easy to find.
2. Measure progress in terms of customers
This is important, especially in the initial stages. Employees will be obsessed with the metric. But it might be difficult for them to comprehend what a 5-point increase in NPS might actually mean. Also, a 5% increase in NPS might not appear to be a lot. However, if the same is communicated as, “We created 400 happier customers and delighted 100 dissatisfied customers by closing their issues” it would be much more encouraging and easy to comprehend.
Start measuring and reporting NPS results in terms of what it means to customers. This makes it more human and people get emotionally attached to producing better results.
3. Harness social media
As important as it is to close the loop with the detractors, it is also important to get the promoters to talk about and promote your brand. Promoters love your brand. Encourage them to share their reviews on the social media, even incentivize them to do the same. This will serve two purposes. Firstly, it will assure prospective customers in buying your product, thus translating into direct business gains. Secondly, it will recognize the good work done by your employees on a public platform, increasing their acceptance towards NPS.
4. Bring in the voice of the customer to the employees
The short and simplistic nature of the NPS survey enables people to not only fill the data in a quick time but also fill in the verbatim comments. These verbatim comments are a goldmine of information. Organizations such as Apple and Charles Schwab, which are big advocates of NPS, share the comments of the customers directly with the people higher up the ladder. Reading the comments is akin to walking in the customers’ shoes. In spite of not interacting with the customers directly, employees can still feel connected. Furthermore, negative comments can give a reality check to the employees and provide them with valuable insights to improve the product. Also, positive comments can be a fantastic source of encouragement and recognition for the work put in by the employees.
Avoid making mistakes in the NPS survey
In their book ‘The Ultimate Question 2.0,’ Fred Reichheld and Rob Markey dedicate an entire chapter on conducting NPS surveys correctly; they named the chapter The Rules of Measurement. Inspired by these rules, I would like to share the five surprising mistakes that I see people making in their NPS surveys.
1. Using a scale of 1 to 10 or 1 to 4 or ‘Yes’ / ‘No’
The simple thought behind using a 0 to 10 scale in the NPS survey rather than a scale from 1 to 10 – as highlighted by Fred Reichheld – is that “customers find that the scale makes intuitive sense, probably because of their experience with grades in school.”
You’d agree that everyone understands what a zero score stands for and what a ten on ten means. Using a 1 to 10 scale makes it confusing for people because at times “Number One” gets interpreted as the best.
2. Coloring the scale
I understand the intent behind this practice: you want to make it easy for customers to know how their response is interpreted. Nevertheless, this is ultimately doing you more harm than good.
It is important to remember the very reason you decided to collect customer feedback: to understand what drives customer experience and where you are falling short of your customer’s expectations. There are several businesses that collect NPS feedback because their competitors are doing so and, therefore, the motivation behind collecting customer feedback is only to attain a higher NPS than that of their competitors.
However, if your ultimate goal for collecting feedback is to understand your customers better and learn from their feedback, you need to let your customers give you an unbiased feedback. You also need to be okay with the fact that a few customers may incorrectly select a rating. If you have built the right closed-loop feedback process, you will identify such customers and still have an opportunity to understand their point of view.
The problem with coloring the scale is that it tends to influence people’s response. By telling your customers what the scale actually stands for, you are essentially asking them to rate you on a three-point rating scale, not a zero to ten rating scale. In his well-researched article, Raghav Arora – Senior Manager at Max Healthcare, talks about the impact of this on people’s responses to your NPS questionnaire. In his research, Raghav found that a coloured scale could inflate the final NPS by as much as 18 points! This is good news if you are only chasing a higher score. However, if your goal is to improve customer experience and claim customer loyalty, then this will prove to be a failing formula.
3. Not communicating the customer experience goal
The key to utilizing NPS feedback for organizational growth is setting up a customer experience goal and not an NPS goal. When you set a goal for NPS, people will be intrinsically motivated to chase the score and find ways to report an upward trend in NPS irrespective of whether customer experience improves.
It is pivotal to keep customer experience at the core of your NPS survey. Build a shared customer experience vision for your brand, share it across the organisation, and keep reminding people about the vision. Doing so will keep everyone aligned with the goal of delivering a great customer experience. This alignment will automatically take care of the NPS.
Doing the NPS survey alone will not help; you must substantiate it with the vision of delivering great customer experience, else people will soon stop believing in the survey results.
4. Considering NPS as just another question in a survey
This is another big mistake I have seen so many organisations commit. When the “would you recommend…” question is embedded within a longer survey, most times people wouldn’t respond to that question; they might not even get to it before dropping off from the survey.
It is important to keep the NPS questionnaire short. A short questionnaire guarantees that you will capture a good number of responses, which not only is valuable from data standpoint, but also gives you more opportunities to talk to customers.
In multiple cases, I have observed that people try to stick in the NPS question into their existing feedback form. It will, of course, get you the feedback but that shows a lack of clarity on what would be done with that data. NPS is supposed to be used as an operating metric and not a market research parameter.
5. Not asking the right question
Now, this is a rare one. I have seen some surveys with a zero to ten scale, but the question was asking how satisfied I was with the service. This is wrong because NPS is designed to identify a customer’s loyalty towards your brand and satisfaction doesn’t mean loyalty. In ‘The Ultimate Question 2.0’, an entire chapter is dedicated to identifying the right question – it’s called ‘Discovering the Right Question’. Through that chapter, the founders of NPS convey their motivation behind asking the right question – “All this number crunching had one goal: to determine which survey questions showed the strongest statistical correlation with repeat purchases or referrals.”
Therefore, when Fred Reichheld zeroed down on the question – “How likely is it that you would recommend us to your friends and family?” – it was a result of studying several hundred businesses and understanding which question could help identify the driver of loyalty in those businesses. If you are using any other form of this question and reporting the metric as NPS, you are essentially disregarding the research and possibly doing a disservice to your business.
Use tools to measure, monitor, and manage NPS
In an article on LinkedIn, Maurice FitzGerald, author of four books on customer strategy and ex-VP of Customer Experience at HP, covers the pros and cons of different scale of technology solutions to run and manage the NPS survey. He covers a range of simple, basic, and advanced infrastructures and how to kind most effectively. Maurice appropriately suggest:
Unless yours is a very small company, you will not be able to implement and operate an effective Net Promoter System or any other feedback and improvement system without appropriate technology.
By using automated advanced tools such as Omoto, an omni-channel NPS solution, organisations have enhanced their customer satisfaction rates by 70%. Moreover, they have been able to cut down the turnaround time to act on feedback by 90% and reduce the manpower required in collecting, collating, analysing, and reporting on the same by 75%. This has had a positive impact on their growth and profitability.
Whether you are just starting up or are a mature SaaS business, it is imperative to focus on improving the customer experience measurably. Use Net Promoter Score as a proxy for customer experience and setup the right processes to improve NPS. Make sure that you are focussing on a positive trend in your NPS more than being hooked to a specific number target.
By virtue of the nature of their business model, subscription businesses need to improve customer retention and build customer loyalty to become profitable. For a SaaS founder or CEO, NPS will help identify the reasons leading to customer churn. The reason, however, doesn’t lie in the score itself, it lies in the qualitative data that customers provide in their feedback. Therefore building the right mechanism to analyse the qualitative data will be crucial in making the best out of NPS feedback. It goes without saying that NPS is not a magic wand that will transform your SaaS business but it surely is a tool that can help you proactively identify and take the necessary action to improve your business health.