Net Promoter Score (NPS) [CapiPedia]

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======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.
===== How is NPS Calculated? =====
The calculation is refreshingly straightforward. Based on their answer to the "ultimate question," customers are sorted into three distinct groups.
==== The Three 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 Formula ====
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.
  - 100 customers are Promoters (9s or 10s) -> 50%
  - 60 customers are Passives (7s or 8s) -> 30%
  - 40 customers are Detractors (0s to 6s) -> 20%
The NPS would be: 50 - 20 = **30**.
===== Why Should a Value Investor Care? =====
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 Window into a Company's Moat ====
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.
==== A Leading Indicator of Growth ====
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.
==== A Tool for Qualitative Analysis ====
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.
===== Limitations and Caveats =====
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 Capipedia Bottom Line =====
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.