Net Promoter Score (NPS)

Net Promoter Score (also known as NPS) is a widely used metric that measures customer loyalty and satisfaction. Developed by Fred Reichheld of Bain & Company, it’s built around a single, powerful query often called “The Ultimate Question”: “On a scale of 0 to 10, how likely are you to recommend our company/product/service to a friend or colleague?” The beauty of NPS lies in its simplicity. Instead of long, tedious surveys, it provides a quick, digestible score that executives and investors can easily track over time. For a value investor, NPS can be a powerful leading indicator of a company’s health. A consistently high or improving score often signals a strong brand, happy customers, and potentially a durable economic moat. It suggests the company is doing something right, creating a base of enthusiastic fans who not only keep coming back but also act as a free marketing force.

The process is refreshingly straightforward. It segments all customers into three distinct categories based on their answer to the ultimate question. The final score is then calculated from these groups.

Based on their 0-to-10 rating, customers are classified as follows:

• Promoters (Score 9-10): These are your company's biggest fans. They are loyal, enthusiastic advocates who fuel growth through repeat purchases and word-of-mouth referrals. They are the engine of a healthy business.
• Passives (Score 7-8): These customers are satisfied but not truly loyal. They are vulnerable to competitive offerings and aren't actively recommending the company. They are neutral and have a minimal impact on the score.
• Detractors (Score 0-6): These are unhappy customers. At best, they might churn and leave. At worst, they can damage the brand's reputation through negative reviews and by warning others to stay away.

The formula ignores Passives entirely and focuses on the two extremes that truly drive a company's future. NPS = Percentage of Promoters - Percentage of Detractors The resulting score can range from -100 (if every customer is a Detractor) to +100 (if every customer is a Promoter). For example: Imagine a company surveys 100 customers.

1. 50 customers are Promoters (50%)
2. 30 are Passives (30%)
3. 20 are Detractors (20%)

The NPS would be: 50% - 20% = 30. A score above 0 is considered good, above 50 is excellent, and above 70 is world-class.

For investors, NPS isn't just a marketing fluff number; it's a window into a company's qualitative strengths, which often precede quantitative results on the income statement.

A high and stable NPS is often a sign of immense customer loyalty. This loyalty is a core component of a wide economic moat. Loyal customers are less price-sensitive, which gives a company pricing power—the ability to raise prices without losing significant business. This powerful combination leads to higher profit margins and more predictable, sustainable earnings over the long term. Think of companies like Apple, Costco, or Starbucks; their high NPS scores reflect a deep-rooted connection with their customers that is incredibly difficult for competitors to replicate.

While useful, NPS is not a silver bullet. Investors must be aware of its shortcomings:

• It's a single data point: It tells you what customers feel, but not why. The real gold is often in the qualitative comments that accompany the score.
• It can be gamed: Some companies may push customers to give high scores or only survey happy customers, artificially inflating the number.
• Cultural bias: Scoring tendencies can vary by country. For example, American customers often give higher scores more readily than European or Japanese customers.
• Context is king: An NPS of 20 might be terrible for a luxury hotel but fantastic for a mobile phone provider or an airline, where customer satisfaction is notoriously low. Always compare a company's NPS to its direct competitors and the industry average.

As an investor, you should actively look for a company's NPS. You can often find it mentioned in:

• Annual reports or 10-K filings
• Investor day presentations
• Quarterly earnings calls and transcripts

When you find it, don't just look at the absolute number. Ask these critical questions:

1. How does it compare to the competition? Is the company a leader or a laggard in its industry?
2. What is the trend? Is the score improving, stable, or declining over time? A declining NPS can be an early warning sign of trouble ahead.

Ultimately, NPS is a valuable piece of the analytical puzzle. It provides insight into brand health and competitive positioning that you can't get from a balance sheet or cash flow statement alone. Use it to complement your traditional financial analysis, not replace it.