Fred Reichheld Suggests Earned Growth as a New Loyalty Metric
Fred Reichheld, who created the Net Promoter Score (NPS) 17 years ago, yesterday introduced a new metric, called the Earned Growth Ratio, which he said patches some flaws in the current NPS framework. Reichheld unveiled the metric during a fireside chat at yesterday's Medallia Experience online summit.
Earned Growth Ratio, he said, gauges customer loyalty through the lens of revenue growth, identifying which revenue streams come from existing customers doing more business with a company and which ones come from referrals.
The Net Promoter Score measured loyalty based on one question: Would you recommend this brand to your friends or family?
NPS, he has said, is sufficient to get a pretty good read on customer sentiment, but true loyalty takes the form of repeat purchases, referrals, and responding to requests for feedback.
Reichheld further noted that his NPS metric has been frequently misused, with companies tying it to bonuses and other performance-based incentives. That has prompted some salespeople to manipulate results by incentivizing customers to give higher scores.
Reichheld, though, is not giving up on loyalty as a customer metric.
"For years, we thought loyalty and customer-centricity were one of several ways to succeed in business," he said. "It is increasingly evident with NPS feedback that loyalty may be the only way to sustainably grow a profitable business."
And in today’s business climate, video and voice feedback from customers are key to making feedback “more authentic,” he added.
Reichheld also criticized the common business notion that happier employees make for happier and more loyal customers.
"In the long term, there is only one thing that makes employees happy—putting them in a position where they can enrich the lives of customers, hear the standing ovations when they earn them, and are recognized and rewarded appropriately when the do enrich customers lives," he stated.
Company leadership's job, he added, is to "take care of employees so they can enrich customers' lives."
To that end, company leaders also need to listen to input from the employees on the front lines of customer service, according to Reichheld.
"Employees are the ones who should be figuring out how to better delight customers," he said.
Reichheld further suggests moving away from annual employee surveys and implementing weekly or monthly huddles where employees can talk about what is getting in the way of delighting customers.
"We measure finances very effectively, but that is not what drives the greatest success," Reichheld said. "Human energy and inspiring teams to work toward a common goal, that's they key, and if you can tap into customer energy too, that is the closed loop.
"The primary purpose of any great business is to enrich the lives of customers, not to provide value to shareholders," Reichheld argued. "The things that boost quarterly earnings can often hurt customer loyalty."