As consumers, we’ve all been asked to take a survey in the form of the Net Promoter System ® (NPS). For example, to measure an organization’s satisfaction with my keynote presentation, I may ask this question:
On a scale of 0 to 10, how likely are you to recommend Brittany Hodak to a friend or colleague?
Hopefully, the organization would score either a 9 or 10 to be considered a promoter, or a customer that is so pleased that they’ll recommend my speaking services to someone else. A value of 7 or 8 means the company is passive, or overall satisfied with what they got, but not loyal- meaning they might not work with me again.
Lastly, a score of 6 or less is labeled a detractor, a disappointed customer that could hurt my brand’s reputation. By measuring customer satisfaction, the NPS was designed to predict a company’s profitability.
Fred Reichhold first wrote about his design for NPS in the Harvard Business Review almost 20 years ago. Last month, Reichhold, Darci Darnell and Maureen Burns published an important update to the metric in an article titled Net Promoter 3.0. Here are my top takeaways:
NPS Has Lost Its Credibility
When Fred Reichheld first developed the Net Promoter System in 2003, it enlightened companies to measure their customer loyalty as an indicator of growth. However, without a regulated system, it’s become too easy for brands to misrepresent scores and diminish the integrity of NPS as a whole.
Many companies report their NPS to investors without any context, including the number of people surveyed, the response rate, the method of collecting surveys, etc. Essentially, these numbers can be completely skewed to fit a company’s best interests.
If customer service representatives were given bonuses based on their NPS, don’t you think they would find a way to manipulate the process? As a customer, if a cashier lets you return an item past it’s 30-day return window in exchange for a perfect 10 score on the NPS survey, why wouldn’t you agree?
If a car dealership surveyed customers as soon as they drove off the lot, they’d probably get NPS results of all 10s. After all, who isn’t super excited about buying a brand new car? At this stage, they’ve barely driven the car yet, so they aren’t able to accurately rate their satisfaction with the brand.
However, if you surveyed customers two months after the purchase, you may see different feedback. Perhaps the customers realized the gas mileage wasn’t as efficient as they thought it would be, or they’ve struggled to master the fancy touchscreen dashboard.
Without an official way to regulate the timing and bias of surveys, the NPS results are not trustworthy or all-encompassing of the customer experience. Especially since there’s no real context around the question of whether or not you would make a recommendation.
Those reasons, among others, are part of what has earned NPS a number of unflattering nicknames like “Not Particularly Sufficient” and “No Problem Skewing,” despite the fact that it continues to be popular with big brands because of its familiarity.
Earned Growth Rate Is The New NPS
Reichheld realized that the CX industry needed an updated, standardized metric: “It had to be based on audited revenues from all customers, not just on a potentially biased sample of survey responses, so that it would be far more resistant to gaming, coaching, pleading, and the response biases that plague the results of non-anonymized surveys.”
Enter Earned Growth Rate, the revenue generated by returning customers and their referrals. The Earned Growth Ratio is the ratio of earned growth to total growth. Because this metric is derived from audited accounting reports, it’s almost impossible to manipulate.
Superfans Are Valuable
You may be thinking that growth is growth… Who cares where it came from? If your business brought in $1,000,000 in 2021, does it really matter if $800,000 or $400,000 came from existing customers? The answer is yes, it does matter. A lot.
It costs 5 to 25 times more to acquire a new customer than it does to retain an existing customer. You have to increase your exposure and content marketing, and this can be time-consuming and expensive. Meanwhile, when you focus on keeping the customers you have, you lower costs and reap the same benefits. Believe it or not, increasing your current customer spending by just 5% can raise your profits by 25% or more.
Moreover, your existing customers can become your best advocates — AKA superfans — who refer more customers to your business and thus reduce your marketing needs. When it comes to deciding where to spend money, consumers trust other consumers. They read reviews, talk to friends, and do research. A reported 87% of shoppers begin product searches online before making a purchase. Highly satisfied customers can do the acquisition work for you.
If you’re mainly focused on acquiring new customers, then you’re not nurturing or satisfying existing customers enough to encourage repeat purchases or referrals. Thus, your customers that you tried so hard to convert become “one-and-done” and you’re back to square one: spending to acquire new customers. When your systems encourage customers to stay and refer others, you avoid unnecessary churn.
Since 80% of your future profits will come from just 20% of your existing customers, investors and key stakeholders will want to see a proven track record of retention, or a high earned growth rate, to accurately qualify and predict growth.
If math isn’t your thing, think about it this way: if 90% of your profit is coming from existing customers and their referrals, you must be doing something right! Your brand’s experience must be so great that people want to come back for more and tell their friends about you. That’s sustainable, high quality growth.
Conversely, if 90% of your profit is coming from new customers, that’s an indicator that you had to go out and convert all new customers because not enough people cared to come back… AKA, unsustainable, low quality growth. If you’re an investor or executive, which scenario sounds more promising to you?
Of course, attracting new customers is important for every business to grow, and not all industries can rely on repeat customers (how many years in a row are you going to change the color of your house?). This is precisely why referrals are weighted so heavily in determining a company’s future success.
Customer Accounting Is Vital
Before we get into calculating your brand’s earned growth rate, you need to track where your customers are coming from. Was your customer referred to your business by a friend? Did they see an advertisement on Instagram? Did they run a Google search for your category?
This information is not only vital to understanding your earned growth rate, but it also helps you understand which marketing tactics are most effective and which customer segments are worth more investment.
If you’re overwhelmed by tracking the source of your customers, don’t worry. It doesn’t have to be overly complicated or high-tech. In fact, my dentist’s office hands each new patient a clipboard and asks them to check a box to indicate how they heard about the practice. It can be that simple! When you go back and look at the revenue generated from each customer, you can easily identify the percentage that comes from existing customers, their referrals, or ‘bought’ customers.
If you notice you’re getting a ton of customer referrals, you may want to consider implementing a referral program to reward your superfans for their loyalty.
Calculating Your Earned Growth Rate
To calculate your earned growth rate, you first need to calculate your Net Revenue Retention (NRR) and Earned New Customers (ENC).
Your Net Revenue Retention (NRR) for 2021: the revenue from customers in 2021 that were also with you in 2020, divided by total revenue in 2020. Convert this into a percentage.
Your Earned New Customers for 2021: the percentage of revenue from new customers you earned through referrals only, not advertisements. (This is why it’s super important to track where your customers came from!)
Add your NRR and ENC together. Next, subtract 100%. This is your earned growth rate.
Earned Growth Rate Is Here To Stay
Some brands are still relying on NPS scores to measure customer satisfaction. However, to better qualify your growth and predict your company’s future profitability (or to present your case to an investor!), you’ll need to measure your earned growth rate. Just as NPS took off like wildfire and became ubiquitous among brands, EGR is poised to become a must-measure, must-know metric to tout in the near future.
To start, make sure your internal tracking systems are recording where your customers are coming from. From there, you’ll need to track how much revenue aach customer brings to your company. This will be a huge step in identifying which customers are earned versus those who were bought – plus, you’ll be able to compare the average lifetime value of the two segments.
It doesn’t have to be super-sophisticated. Even if you’re just asking, “How did you hear about us?” and keeping track in your CRM, you’ll be on your way to an easy-to-calculate EGR.
To have a strong earned growth rate, executives and employees must adopt a customer-first strategy. As Reichheld, Darnell, and Burns explained, you cannot purchase advocates; you’ve got to earn them through hard work, personalization, and ongoing investment in the customer experience.
With a tangible, financial connection between superfans and ROI, brands will be forced to embrace the era of the customer for sustainable, profitable growth. For more information on earned growth rate and customer referrals, check out my podcast interview with Andy Cockburn, the co-founder and CEO of Mention Me.