The Relationship Between NPS and Retention (Chiraag Kapoor of Datorama) | ProfitWell Report
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The Relationship Between NPS and Retention (Chiraag Kapoor of Datorama) | ProfitWell Report

January 4, 2020

You’ve got the questions and we have the data. This is the ProfitWell Report. Hey Patrick, what’s the relationship between NPS and retention? Customer satisfaction isn’t everything, but it’s hard to imagine a successful business that doesn’t take customer sentiment into strong consideration. That being said, the cult following around customer satisfaction utilizing Net Promoter Score or NPS is admirable But as we’ll see in the data, NPS is not infallible. To answer Chiraag’s question, we looked at the data from 2000 companies and over 10,000 subscription consumers. As to not bury the lede, NPS as an aggregate measure of customer satisfaction is not a strong indicator of retention. I know that’s gonna be shocking to some of the NPS acolytes out there, but when we look at the data, you’ll notice that those companies who have an NPS score in the lower quartile or in the mid spread of their industry have essentially the same retention with mild variations here and there. We broke out the striations of NPS across the spectrum and consistently the only indicator of any strong correlation in one direction or another is if your NPS was in the upper quartile of your industry. You then tended to have 5 to 10 percent higher retention on an absolute basis. Note that this trend is also consistent when you look at gross churn rate, where upper quartile NPS companies have noticeably lower churn, But median and bad NPS companies are essentially the same. Things get interesting though when looking at expansion revenue. Whereas a company, if you have higher NPS there’s a stronger correlation to more expansion revenue, where lower quartile NPS companies are seeing a median of 9% monthly expansion, where mid-spreads see 14% and upper quartile see 24%. So what does this mean then? Well it means that in aggregate, NPS is very much a reactionary metric that lacks enough sensitivity to be useful as a measure of momentum. If you have high NPS, it’s great, but there’s probably a lot of lurking variables that contribute to your high retention. This also means that if you have above-average NPS, it doesn’t necessarily mean that you’re better off than those who have bad NPS, which is unsettling, given our industry’s obsession with such an insensitive metric. NPS is still useful, just likely only as a framework for identifying those customers on an individual basis who are having problems at raising their hands in frustration, and a blunt metric that when used in aggregate or on a segmented basis really means that you want to be moving up into the right with this metric over time. Put another way, collect NPS but your actual financial and retention metrics are an order of magnitude more important. Well, that’s all for now. If you have a question, ship me an email or video to [email protected], and let’s also thank Chiraag from Datorama for sparking this research by clicking the link below To share and give him a good shout out. We’ll see you next week This week’s episode is brought to you by Later. Visually plan and schedule Instagram posts.

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