Net Promoter Score (NPS)

The Net Promoter Score, or NPS, is a widely used metric that measures customer loyalty and satisfaction with a single, elegant question. Developed by Fred Reichheld of Bain & Company in 2003, it has become a go-to tool for businesses seeking to understand their relationship with their customers. Instead of long, tedious surveys, NPS gets straight to the point: “On a scale of 0 to 10, how likely are you to recommend this company's product or service to a friend or colleague?” The beauty of NPS lies in its simplicity. It provides a clear, digestible score that reflects a company's ability to turn its customers into enthusiastic advocates. For a Value investing practitioner, this score is more than just a customer service metric; it’s a powerful clue about a company's long-term health and the durability of its brand.

The calculation is refreshingly straightforward. Based on their answer to the “ultimate question,” customers are sorted into three distinct groups.

• Promoters (Score 9-10): These are your raving fans. They are loyal, enthusiastic customers who keep buying from you and, crucially, encourage their friends and family to do the same. They are a powerful engine for organic, Word-of-mouth marketing.
• Passives (Score 7-8): These customers are satisfied but unenthusiastic. They got what they paid for, but they aren't loyal and could easily be tempted away by a competitor's shiny new offer. They are neutral and do not factor into the final NPS calculation.
• Detractors (Score 0-6): These are unhappy customers. They may have had a bad experience, feel their money was wasted, and are at high risk of churning. Worse, they can actively damage a company's reputation through negative reviews and bad word-of-mouth.

The final NPS score is calculated by subtracting the percentage of Detractors from the percentage of Promoters. NPS = (% of Promoters) - (% of Detractors) The result is not a percentage but a whole number that can range from -100 (if every customer is a Detractor) to +100 (if every customer is a Promoter). A quick example: Imagine a company surveys 200 customers.

1. 100 customers are Promoters (9s or 10s) → 50%
2. 60 customers are Passives (7s or 8s) → 30%
3. 40 customers are Detractors (0s to 6s) → 20%

The NPS would be: 50 - 20 = 30.

While NPS might seem like a marketing metric, it's a treasure trove of information for the savvy investor. It provides a direct look into the quality of a company's relationship with its most important asset: its customers.

A consistently high NPS is often a sign of a powerful Competitive advantage, or what Warren Buffett famously calls a Moat. Companies with beloved products create intense customer loyalty, which translates into several benefits:

• Pricing Power: Happy customers are less price-sensitive.
• Repeat Business: Loyal customers form a reliable base of recurring revenue.
• Lower Marketing Costs: Promoters are a volunteer marketing army, reducing the need for expensive advertising campaigns.

A business that customers love is one that competitors will find incredibly difficult to disrupt.

Financial statements tell you where a company has been. NPS can help you see where it's going. It's a leading indicator of future performance. A rising NPS can predict:

• Higher Revenue growth: More promoters lead to more sales.
• Lower Churn rate: Happy customers don't leave.
• Increased Customer lifetime value (CLV): Loyal customers buy more, more often, over a longer period.

When you see a company's NPS trending upward, it’s a strong signal that its future financial reports might look very healthy.

Investing isn't just a numbers game. The best investors blend quantitative data with deep Qualitative analysis. NPS is a perfect tool for this. It helps you understand the story behind the numbers. Why is this company's revenue growing faster than its peers? A high NPS suggests the reason is simple: it treats its customers better. This focus on the customer experience is often a hallmark of a well-run, long-term-oriented business.

NPS is a fantastic tool, but it's not a silver bullet. An investor should be aware of its limitations.

• Context is Everything: An NPS of +20 might be a disaster for a beloved consumer brand but world-class for a cable or insurance company. Always compare a company's NPS to its direct competitors and industry benchmarks.
• It's the “What,” Not the “Why”: The score tells you what customers feel, but not why they feel that way. The real gold is often in the follow-up questions that companies ask, which are rarely made public.
• Vulnerability to Gaming: A company could, in theory, manipulate its score by only surveying customers after a positive interaction or by offering incentives for a high score.

The Net Promoter Score is a simple, powerful lens through which to view a company's long-term prospects. While it should never be the sole reason for an investment decision, a strong and stable NPS is a compelling sign of a healthy customer base, a durable brand, and a potential economic moat. When you find a company that its customers are willing to champion for free, you may have just found a business worth a much closer look. It's a crucial piece of the puzzle in identifying truly exceptional companies built to last.