E179 | Why Referrals are Essential for Business Growth and Reputation with NPS creator, Fred Reichheld
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PodbeanHow loyal are your customers and employees? How likely are they to refer your organisation to their colleagues and friends?
This is the basis of the Net Promoter System, a way of measuring customer retention devised by Fred Reichheld in the 1990s. Because Fred realised that if you increase customer retention, your profits will grow.
Fred assumed that having discovered this and told people about it that all businesses would instantly put customers first. That what he’d come up with was a one and done thing. He hadn’t realised how hard it would be to change mindset.
So Fred invented the Net Promoter Score so that businesses could measure this thing that drives retention. And he found that it all boils down to one simple question – would you recommend X company to a friend or colleague?
It’s that simple. Yet here we are, some 20+ years later still arguing about NPS.
So Fred’s written another book called – Winning On Purpose, The Unbeatable Strategy Of Loving Customers (link below), and it’s a more accountancy based metric i.e. earned revenue or earned growth rate.
This is a truly fantastic conversation with Fred, we enjoyed it immensely, we’re sure you will too.
On today’s podcast:
- The Earned Growth Rate
- Net Promoter System
- Likelihood to recommend
- Be humble to keep customers
- Why referrals are earned growth
Links:
- Fred Reichheld
- Article: The One Number You Need to Grow
- Twitter – @FredReichheld
- LinkedIn – Fred Reichheld
- Website: https://www.netpromotersystem.com/books/winning-on-purpose
Why you should treat your customers right with Fred Reichheld
Fred Reichheld is the creator of the Net Promoter System (NPS) of management, and of the earned growth rate, the founder of Bain & Company’s Loyalty Practice, and the author of five books including the New York Times bestseller – The Ultimate Question 2.0.
The Earned Growth Rate
The earned growth rate is a large part of Fred’s newest book – Winning on Purpose, a book which explores how you earn the loyalty of your customers and your employees.
The earned growth rate is the important next step to NPS – if NPS is a survey score with strengths and weaknesses, earned growth is the accounting twin that makes both of them stronger.
“I joined Bain in 1977. And within the first few years had figured out that there were certain companies that were just special, some were big, some were small, but they were all generating way more cash and growing faster than the traditional economics and strategy models could explain. And the common denominator was that they were earning the loyalty of customers and employees.”
Fred wrote his first book all about how to earn those economics, his second was all about leadership. And then he came to the recognition that the business world doesn’t have an accounting and measurement system that allows leaders of global diversified companies to do that effectively. So he invented the Net Promoter Score.
Net Promoter System
“The economics of loyalty were extraordinary, the wow statistic was that you increase the retention rate in a typical industry by five points, say, from 85% retention to 90% retention, and you will increase the net present value of the customers by 25 to 100%.”
Just by changing your retention by 5 points, you get double the customer value which of course means twice the cash flow.
To Fred it was a no-brainer: customer retention was key to growth. But, he says, people just didn’t understand that.
And so he began to fixate on retention and why it’s a good thing. Because it’s not just monetary value that it yields either, loyal customers give you referrals, employees are treated better, shareholder value increases. It’s a win-win all around.
Likelihood to recommend
However, Fred quickly realised that retention wasn’t the right focal point for measurement as it led people down the path of ‘we have to trap our customers and make it hard for them to leave’, rather than ‘make their customer experience so fantastic they won’t want to leave’.
“So I thought, how are we going to get real contemporary insights? So we looked for a survey question. One question, because I hate surveys. And we tested for what the right question was, that was the best indicator of someone’s real happiness, that you enrich their life and ‘likelihood to recommend’ was the winner by a mile.”
The thing is, it’s such a simple concept to grasp, yet, says Fred, people keep misinterpreting how to use NPS, or they simply don’t listen.
“I was surprised. I thought I could retire after my first book, but it’s amazing how hard it is to get people to change their mindset. Showing them how to get rich isn’t enough, showing them how to live a better life isn’t enough.”
But that’s not to say everyone has ignored his advice, far from it. Fred freely shares that he’s made more money investing than through his NPS work, because of his investment strategy. He doesn’t look at company financial statistics, he simply looks at a company’s Net Promoter Score and the ones that are streaks ahead of the pack, whose customers love them, have been the ones that he’s invested in.
“I came out with this ho-hum piece of work that said, ‘treat your customers right’. That’s the way to succeed.”
Big NPS and Little NPS
Fred has responded to the naysayers with a little solution – Little NPS and Big NPS.
Big NPS is customers come first, that’s a company’s primary purpose. Loving customers, says Fred, is the only way to win. The only way to deliver shareholder value over time is to be an exceptional lover of your customer. It’s a philosophy and an investment reality. Without the mindset that customers are the business’s sole purpose, why does the business exist at all? Asks Fred.
“I guess the most radical thing I found in preparing this book [Winning on Purpose] is that only 10% of business executives agree with that idea. Only 10% would say customers are the primary purpose for our business. It’s stunning to me that something so obviously correct, is only agreed to by 10% of the world.”
Be humble to keep customers
The final chapter of Winning on Purpose is all about being humble, because it’s the one thing that most leaders screw up on, says Fred.
“Because if you’ve been successful, the thing that gets you and destroys your business is this lack of humility about how hard it is to keep listening to customers, and figuring out how to wow them and be remarkable.”
Doing business to get rich is such a flawed idea, says Fred, you do business to be of service to your customer, and help your teams lead lives of meaning and purpose, through enriching customers’ lives.
“The whole idea is to be doing business with good people, and to help them make their lives better.”
Why referrals are earned growth
When new customers come to your company ask them why they chose you, why they opted for your services, says Fred. Your reputation is a part of your earned growth, as opposed to your bought growth. Which is why he’s invented an accountancy based score following on from NPS.
“Andy Taylor, the guy that built Enterprise – the largest car rental company on Earth, said there’s only one way to grow a business sustainably: you treat your customers so they come back for more and bring their friends. And so earned growth is just literally taking Andy’s words and making it into an accounting statistic.”
Coming back for more is your net revenue retention, i.e. how much of your revenue is coming from existing customers coming back and buying more of your stuff. And how many of them are bringing referrals i.e. bringing their friends.
Referrals are everything for business and growth, says Fred.
“It sounds simple, but I’ve been wrestling with this for decades, but I knew referrals were everything. That’s why ‘likelihood to recommend’ is the one question that best predicts repeat purchase and expanded purchases and even survey response rates go up with the ‘likelihood to recommend’ scores.”
Book recommendations
- Chris Zook & James Allen – The founder’s mentality
- Jack Bogle – The little book of common sense investing
- Leonard Mlodinow – The Drunkard’s Walk
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