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Hello earned growth

Andy Taylor is the boss of Enterprise Rent A Car. He famously and wisely has said that the only way to grow a business is to treat customers so well that they come back for more and bring their friends. This philosophy has served him well as his business has beaten nearly all other rent-a-car competitors into a cocked hat. However, we need some way of measuring how well we treat customers and to what extent this results in them introducing us to their friends.

First we must consider how we measure customer activity within our companies. Fred Reichheld of Net Promoter fame believes there is much to be said for customer based accounting rather than financial accounting. Unfortunately, most accountants don’t see customer based accounting as important. They are trained in financial accounting which focuses on sales and profit associated with products. In contrast customer based accounting looks at how many customers you have today that you also had last year. It examines what customers are buying, the profitability of those customers and how their purchases have changed over time. Customer based accounting seeks to find out to what extent you are delighting customers and to what extent the customer experience you provide is earning you growth.

Customer lifetime value is another metric which is often used as a proxy for great customer experience. In general you would expect the lifetime value of a customer to rise if you are doing a great job. However, in a rising market the increased growth of a customer may simply be a market trajectory that is upwards and it may have nothing to do with the delivery of your customer experience. It is also a challenge to measure customer lifetime value as it involves assessing the cost of acquiring and serving the customer and this isn't always easy.

This brings us to the subject of the Net Promoter Score. It aims to measure the relationship between a customer and a supplier by determining how likely they would be to recommend the supplier on a scale from 0 to 10. It doesn't stand alone. There is a supplementary question – "Why did you give that score?" and this helps us understand the route cause of the numeric answer.

So successful has been the Net Promoter Score that it has become a world wide measure. We can use it to benchmark against divisions with our companies, against competitors and against the Amazons and Teslas that set expectations. Many companies link sales targets and remuneration to the score. To some extent this has muddied the waters. Car salesmen may follow up their sales patter with a plea to give them a high score as their remuneration depends on it. Also, we are bombarded with the “likelihood to recommend” question. It tracks almost all the major purchases that we make and, as a result, it is increasingly ignored.

Fred Reichheld believes there is a need to go beyond how likely people would be to recommend a company and to understand the behaviour of customers. For example, imagine one of your customers tells five people about your wonderful company and they in turn become customers; how do you measure this? These are new customers you have earned through great customer experience. They are quite different to new customers who you may have bought through expensive promotions and marketing. Earned customers cost you less, they spend more, give more recommendations and are likely to be more loyal. It is earned customers that we must seek.

Reichheld writes about this in his new book called "Winning On Purpose". It is also the subject of an article in Harvard Business Review by Fred Reichheld, Darci Darnell, and Maureen Burns called "Net Promoter 3.0". The centrepiece of Reichheld's new thinking is that earned growth rate comes from delighted customers who return again and again and who also promote your company to others.

The problem with this very worthwhile metric is that it isn't easy to measure. A customer who increases purchases from your company may be doing so because their business is growing and not necessarily because you are doing an amazing job. A new customer that comes on board may have seen one of your adverts and not joined as a result of a recommendation. The best way you can find out how and why they have become a customer is by talking to them. Understanding the earned growth rate means having a dialogue with the customer. There is nothing wrong with that - but it isn't easy.

Measuring the “earned growth rate” requires us to find out the primary reason a customer is doing business with us. This has its difficulties as some customers may struggle to give an appropriate answer. It is suggested that customers are presented with some options such as "trustworthy reputation", "recommendation from friends", "seen an advert", "helpful salesperson", "good price deal". The first two of these options would put the customer in the "earned" bracket while the others suggest that it has been "bought". But is that right? Someone who opts for "trustworthy reputation" may say this, not knowing quite why they think that way. In fact it may be that they have been influenced by brand advertising that has subliminally moulded their perceptions over many years. This isn't an earned customer, it has been bought.

So, say hello to earned growth rate. No doubt we will hear more about it if we can find a way to readily distinguish between earned customers and bought customers. In the meantime don't forget there are other ways we can measure our performance in delivering customer experience. They all have their place.



Where to use it

Customer satisfaction score

On a scale from 1 to 10 how satisfied are you with company X?

Determine strengths and weaknesses of a company on different aspects of its customer value proposition

Net Promoter Score

On a scale from 0 to 10 how likely would you be to recommend company X?

Establishes loyalty to accompany and is an indicator of its growth and profitability

Customer effort score

On a scale from 1 to 10 how much effort is required to do business with company X?

Indicator of ease of doing business and future market share

Net value score

How would you rate company X on its products or services compared to other similar suppliers? (And similarly how would you rate it on its prices?)

Positions a company on the value equivalence line

If this subject interests you, find out more by going on YouTube and listen to the Blake Morgan podcast "Goodbye NPS? Inside the new metric for CX success – with Fred Reichheld"


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