Fred Reichheld brought us the Net Promoter System/Score. As such, he certainly knows how to popularize marketing metrics. He has now introduced a new marketing metric, earned growth. I need to think about it more but it seems to have some potential. Plus, the introduction seems to have avoided some of the problems of NPS which is a good sign of progress.
The Problems With NPS
Reichheld and his colleagues tell us that problems with NPS have led to the need for another metric. He wouldn’t be the first person to be a bit defensive. We all do it. But it does seem like the problems were, at least partly, his responsibility. He introduced NPS as the “one number you need to grow”. Yet, the evidence was never good on that front. As such, it doesn’t seem surprising to me that people found it confusing. It morphed a little from “one number” to a system as, it appears to me, Reichheld tried to backpedal a little on the more implausible claims.
He is distressed that people use it as a target. That strikes me as a bit naive. If senior managers were using it then people at less exalted levels will want to massage the metric. A good metric is relatively ungameable, so the idea that NPS was all you needed to know obviously had problems baked in.
Unfortunately, self-reported scores and misinterpretations of the NPS framework have shown confusion and diminished its credibility. Inexperienced practitioners abused it by doing things like linking Net Promoter Score to bonuses for frontline employees, which made them care more about their scores than about learning to better serve customers.Reichheld, Darnell, and Burns (2021) page 84
This seems sensible but it does seem a bit like being shocked to see gambling taking place. A side note but some of this discussion makes me pretty cynical. I wonder if the big consultancies would like us to think that employee bonuses corrupt the little people who abuse them but bonuses are vital to incentivize senior executives.
A Challenge With Writing
There is an interesting writing problem. Reichheld doesn’t want to diminish NPS. (It is his baby after all). Yet, he still wants to share something that addresses the problem and improves things. The writers do a pretty good on that front to be honest. They suggest the need for change without admitting any part in the problem.
Things get more interesting because his Bain colleague and co-author Rob Markey has recently been recommending something similar to customer lifetime value (CLV). There is an attempt to get the ideas coming out of Bain to fit together. It mostly makes sense and so I’d largely support them. You need good customer records to use CLV or to use the new earned growth metric. Hopefully, customer record keeping will improve further if more people listen to Bain.
Overall, I take the point that there is room for a variety of approaches. I do appreciate Reichheld’s desire for simplicity. That also struck me as the best bit of NPS.
Quality Of Revenue
It makes a lot of sense that all revenue is not all the same. People talk about its quality. Basically, a firm that gets a lot of repeat business is better than one which doesn’t. Especially interesting to Reichheld are referrals and firm reputation. He really likes willingness to recommend metrics after all. He calls new customers that come through these more organic forms ‘earned new customers’. When you have to advertise these are ‘bought customers’.
This distinction is similar to how people talk about media. Earned media is when you get media because you are newsworthy. People occasionally call this free-media, but public relations type people, rightly, note that a lot of effort goes into getting media for free. The contrast is with paid media when you pay to get in front of people, e.g., advertising.
A New Marketing Metric, Earned Growth
Given their interests the authors introduce a new marketing metric, earned growth. The idea is that you want to see where your revenue is coming from. There are four buckets to consider.
Revenue from existing customers (net revenue retention). This is when you continue to get revenue from your current customers. This is generally a good sign. You are doing something right when people want to continue giving them their money. If you have a good customer records system you should be able to see revenue from customers last year and see how much revenue you get from them this year.
There is also an unseen bucket. Revenue from last year you didn’t get this year. This is trickier but it is important to worry about. What could you have got?
How to deal with new customers? The revenue from these is split based on a question asked to the new customers. “Why did you buy?”
- Buying in response to referrals and reputation shows revenue from earned new customers.
- While advertising and sales leads are classes as bought new customers.
Generally speaking, if you are earning revenue you are doing something right. One can see why earned revenue might be more sustainable than bought revenue.
The new earned growth metric is just the revenue from last year’s customers added to the revenue from the earned customers. It seems like a neat idea.
The Advantage Of The Metric
An advantage of the new metric is that the revenue numbers are much harder to massage than survey responses. They are based upon revenue which is recorded pretty well in company records. This is getting away from the gameability in NPS. The authors argue:
By developing auditable statistics, brands will be able to validate significant investments in providing superior customer service.Reichheld, Darnell, and Burns (2021) page 89
It is a worthy goal. Let’s see how this goes.
Read: Fred Reichheld, Darci Darnell, and Maureen Burns (2021) Net Promoter 3.0: A better system for understanding the real value of happy customers, Harvard Business Review, December