Are You Winning on Purpose?—The Creator of the "Net Promoter" Tells Us How!
Welcome to Why Customers Buy, my weekly LinkedIn Newsletter series that explores how customers make decisions. It reveals ways to unlock what customers really want with new concepts and practical tips that drive value. Subscribe today right here.
No time to read? Listen to the podcast episode instead:
Back when I was working in corporate life, I went to a presentation in London. Sitting there amongst 1,000 people, I had an epiphany about what I wanted to do with the rest of my career. Soon after that, I founded my global Customer Experience consultancy, Beyond Philosophy. The Speaker was New York Times Best-Selling Author Fred Reichheld, inventor of the Net Promoter Score® (NPS). We had him on the podcast recently to talk about his new book, Winning on Purpose: The Unbeatable Strategy of Loving Customers.
Reichheld’s inspiration for the book was his frustration about the misuse of the NPS system. Fortune reported over two-thirds of the Fortune 1000 used NPS, but in Reichheld’s experience, most organizations were not taking advantage of its core purpose. (I couldn’t agree more with him on this point.) Reichheld’s book is an attempt to get users back on track.
Reichheld says the fundamental idea behind an NPS system is for organizations to love their customers and treat customers in a way that enriches their lives. Doing so has business implications because when you do, people come back and bring their friends.
Also, treating customers well is good for employees. Employees often feel enriched when they serve others, especially when customers appreciate it. Reichheld says NPS collects those recognitions so employees can hear them. Furthermore, when employees don’t earn that praise, NPS will show what they should change.
So, What Went Wrong with NPS?
Unfortunately, Reichheld says too many organizations use NPS as a stick or a metric for earning bonuses. He says that any time you link a survey-based score to someone’s career or compensation, bad things happen. Employees will do everything in their power to change the score, and the score becomes an obsession rather than earning the score. Reichheld says most companies have mangled the original NPS concept with leaderboards that compare scores between employees or withholding compensation related to it. Others would use the score to report to investors with no standards for score collection or disclosing response rates; some even withheld low scores to make their overall look better. All of these actions destroy the credibility of the scoring process, Reichheld says.
The book lays out some of the best practices for maintaining credibility for the Net Promoter System. For example, Bain and Company, where Reichheld worked when inventing the concept, was the first to adopt it. One of the outcomes was Bain now measures NPS in a scientifically rigorous way called NPS PRISM®.
Moreover, with Net Promoter’s robust feedback, you know better what companies will succeed in the market. He says that the financial metrics most companies use for valuations point you toward the wrong investments. Instead, what drives financials long term is customers coming back for more and bringing their friends.
Reichheld started investing in the companies that consistently scored well. As a result, his stock portfolio tripled the market over the last decade. Want to know more about how to do the same? Buy his book!
Reichheld says the title reflects how the book is about living a purpose-driven life as an individual, team, and company. The organizations that enrich customers’ lives, solve their problems and put smiles on customers’ faces succeed. Those that try something else fail.
The Role of Leadership in NPS
Leadership is another integral part of the NPS success. People need compensation to do a job. Therefore, salary and benefits have to be fair and reasonable. However, pay and benefits are not what inspire people. Reichheld says what motivates employees is being a valued team member winning with its customers and making customers’ lives better.
Reichheld says great leaders understand that they have to take care of their employees, inspire them, and embrace the proper mission to enrich the lives of the customers that they touch. Then, once the teams are on that mission, their job is to watch out for employee safety, health, and well-being and ensure employees have the right tools to accomplish that mission. Net Promoter gives them a system to let employees know when they have succeeded and when they haven’t.
Moreover, Reichheld says until you can measure something, you can’t learn and make progress. You can’t develop a common language where people agree on what constitutes successes and failures. So, the need to measure is crucial.
Of course, things like “enrichment” are hard to measure. Reichheld says NPS Prism helps.
The Earned Growth Rate
Instead of complaining that people don’t use Net Promoter appropriately, Reichheld decided to present an alternative that’s an appropriate metric to hold people accountable. Reichheld also wanted it to be accounting-based because it is well regulated, and there are rules for measurement. In other words, people in accounting go to jail if they cheat.
His new metric concept is called Earned Growth Rate. The Earned Growth Rate measures the revenue growth from return customers who bring in their friends. Also, the Earned Growth Rate separates that development from the other efforts that drive growth, like marketing, store acquisition, and other measures along these lines.
There are two parts to the Earned Growth Rate. First, part of Earned Growth is revenue from existing customers coming back for more and expanding their purchases. Several industries use this metric already. For example, Software as a Service (SaaS) companies have a net revenue retention rate, a well-defined component that links to SaaS companies’ market valuations. Furthermore, investors already understand it.
The other part is the trickier one to follow, which is keeping track of those happy existing customers’ referrals. The one Reichheld and the team at Bain have been using is asking customers, “What’s the primary reason you decided to do business with us?” When they check the box for recommendations or referrals, it’s Earned Growth, and you can keep track of it. If you want extra credit, find out the customers who had the most significant influence on deciding to do business. Then, you can learn who is generating referrals and why and what you could do better to make those customers feel the love and want to share it with all their friends and colleagues.
He likes this system better than using profits. Profit is how much money you pull out of your customer’s pocket, not how much enrichment you put into it. Moreover, Reichheld maintains there are good profits and bad profits.
Bad profits are any profits that you earn from a customer that’s a detractor. In other words, bad profits do not make customers feel satisfied. An excellent example of bad profits is when they charge you three- or four-hundred percent markups when you return the rental car without a full gas tank. Bad profits are also when an airline charges you $200 to change a ticket for a flight six months out. The airline has no cost except the administrative effort, but they’ll charge anyway. These profits make accountants happy because they look like profits, but they make customers angry. These profits not only destroy the firm’s reputation and the future of the business, but he says they also suck the soul out of employees that have to implement those aggressive policies.
I have seen this in my career, too. When I used to be in corporate life, it used to bug me that the guys who sold the most would be stitching up a customer or overpromising somehow. I always felt that was wrong. Moreover, making bad profits like these was not sustainable for the organization going forward.
A story in the book explains good profits. Scott Cook, Founder of Intuit, the software firm at $150+ Billion in market capital, started at Bain with Reichheld. Cook used to say, “Fred, we don’t deserve a dollar of profit from a customer until we’ve made that customer happy.”
Adding to Cook’s sentiment, Reichheld says good profits also create promoters. Therefore, if you make customers happy and customers tell their friends, then any profits from that customer and their friends are good profits.
So, What Should You Do with This Information?
This information is all interesting and whatnot, but is it practical? As you know, I believe that theory is grand, but if you can’t use it, it isn’t constructive. So, if you know that you need to apply it in your experience, what advice does Reichheld have for you?
His first advice is to read the book, followed by implementing the concepts he explains inside. However, people can do other practical things based on what you know so far, too.
First, Reichheld says, Customer Experience professionals in a leadership role should determine what everyone in the organization thinks is the primary purpose of the business. So the first question will be multiple choice for the question, What’s the primary purpose for our company? The answers would be:
a. To become a great place to work for employees.
b. To maximize shareholder value.
c. To enrich the lives of our customers.
d. A balance to all shareholders.
Reichheld says that it’s likely surprising how few people will answer c. It’s usually around 10 percent. That means 90 percent of the respondents do not think their company’s primary purpose is to enrich customers’ lives, which represents an enormous opportunity for most organizational leadership.
The next question would be open-ended. Reichheld recommends it should be, “What’s the one change the company should make to live up to our purpose?” He says leadership will see how far you need to go to change people’s thinking on whether the customer is first or not. In the happy situation where you see that customers are first, the open-ended answers will give you a better idea of improving your efforts to enrich customer lives.
Reichheld also recommends measuring Earned Growth and making that the accounting metric. Sure, some people might want to cheat at it, just like they do with booking revenues inappropriately or lying about costs. However, accounting is a process for finding the cheaters, fixing them, and making it harder to cheat.
Like many things with experiences and customer strategy, culture is at the center. Reichheld’s Chapter 8 talks about how to build systems that reinforce cultural values in rigorous ways. He also thinks there is too little effort put into companies. He charges the CEO to make the culture and determine how to measure success in that community.
Leaders should build persistent systems that work not only once a quarter or for the annual employee survey but twenty-four hours a day, seven days a week, 365. When no one’s looking, organizations just keep doing it. The purpose is to make people proud to be part of your team.
Reichheld and the team have the employees evaluate their leaders anonymously. Then, Reichheld’s group asks employees how likely they were to want to work with this person again and if they would recommend this person as a good leader. Reichheld believes these scores should drive promotions rather than sales figures. With that as the metric, managing partners and office heads should exemplify the core values that provide enriching experiences for employees.
There is a lot of change in the experience industry right now. As a result, any organization’s customer strategy will need new ideas about measuring and improving experiences for customers moving forward. Identifying opportunities with NPS and the Net Promoter System for economics could help the next level of experience economics.
Do you have a business problem pickle that you would like us to solve? We’d love to hear it. Please tell us about it by clicking here.
There you have it. No promotions, no gimmicks, just good information.
We hope you enjoyed this issue of Why Customers Buy. If you have, please forward it to a friend or colleague.
Think reading is for chumps? Try my podcast, The Intuitive Customer instead. We explore the many reasons why customers do what they do—and what you should do about it. Subscribe today right here.