Transcript of Fred Reichheld: How to Build a Business Customers Can't Stop Recommending | Entrepreneurship | YAPClassic

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What's up, YAP fam? Your customers can be your best sales team, but only if you give them something worth talking about. And I've seen this in my own business. So much of our growth has come from relationships, referrals, and people having a great experience with YAP Media and wanting to spread the word. That's what Will Guidara taught us on Monday. Hospitality makes people feel seen, valued, and remembered. And today's App Classic is the perfect follow-up because great hospitality creates great customer loyalty. So today we're bringing back my conversation with Fred Reichheld, the creator of Net Promoter Score and one of the top voices on customer loyalty. Fred reminds us why the best businesses do not just chase new customers, they create loyal fans who come back, bring their friends, and help the business grow. So with that, let's get into my conversation with Fred Reichheld. Fred Reichelt.

Hey Fred, welcome to Young and Profiting Podcast.

Thank you. Great to be here.

I am excited for this conversation. Thanks for joining me. So before we get into customer loyalty and what it means to love your customer, I would love to back up and I feel like a good place to start is right after college. From my understanding, you've been working at your job, Bain Company, since you graduated in 1977. It's not often that somebody stays at the same company throughout their whole career these days. So, Granted, you are halftime now, but you still rep that organization. And to me, it seems like you really took a different approach. You were an intrapreneur within the organization. You launched iconic products like NPS. You've been speaking, writing books, and I'm sure that kept things interesting for you. So my first question is, you know, why did you stay so long at Bain Company? How have you kept it spicy all this time? And why did you, you know, decide to stay there your entire career?

Great question, and one I ask myself regularly. I think the primary reason I've stayed at Bain all these years is it's assembled a group of really special people with values that I admire. The whole firm was committed to this idea that our primary purpose is to help our clients succeed, to make our customers' lives better, solve their problems. And that turns out to be a profitable strategy. It's commercially successful, but in— It's more important. I think it's a life-enriching mission that when you serve others and get recognized and rewarded when you help other people succeed, that actually inspires energy. So, you know, it's been financially great for me, but at this point in my life, you know, we have more money than we'll ever be able to spend. It's an energy and focus and what inspires you to keep working hard. And it's that same idea that Bain is a platform that helps its partners, uh, do things that make them, their families, and their communities proud.

Yeah. And like I was telling you offline, a lot of people think the only way to be massively successful is to be an entrepreneur, but that's simply not the case. So I'd love for you to shed light on that a bit.

Well, I think people who are most innovative are, are the ones who are going to be the most successful. And there are certainly lots of examples of building your own firm. But there's plenty of examples of working within firms or within communities, whether it's universities or think tanks. You have a broad range. However, you need the leverage of an organization to really have an impact in the world. And the key is to make sure that you choose wisely an organization that fits your values and is full of people who aspire to similar life goals that are worthy of your loyalty. And then make sure you, you help them succeed. Uh, it's not so much about you succeeding. You've gotta play a big role in helping that organization succeed and fulfill its mission.

I couldn't agree more. So let's talk about the origin story behind Net Promoter Score. You actually said a, a keyword in, in your previous response, Lives Enriched. And from my research, I learned that that was the original name. Net Lives Enriched is what you originally wanted to call Net Promoter Score. So, talk to us about the genesis of this idea and where you got it from.

Well, I was an economics major. And the thing that caught my eye early in my career were organizations, both small and large, that were outperforming any understanding of business strategy or financial accounting that I learned in business school. And we saw this common thread was that they treated people right. They earned the loyalty of their customers and employees. And the right kind of loyalty, this loyalty that is— it's self-sacrifice. It's committing yourself to the success of an organization because of the mission and the principles it lives by. And— but it wasn't measured. And so initially, I looked at an incredible leverage of retention rates of people that kept their customers a little bit longer, doubled, tripled, quadrupled their profits. And no one knew that. But over the years, it's transitioned. It's— I think the economics is the reward is one of the benefits, but—

Yeah.

The real root cause are organizations that are committed to making their customers' lives better. Because it's more than a commercial mission. It's a, you know, everyone talks about making the world a better place. I'd say, let's get serious about making the world a better place and start with the customers, the people whose responsibility you have to serve and solve problems for.

Yeah, and I'd love to stick on that a bit. Why do you think the greatest companies are the ones that enrich their customers' lives?

Well, in my youth, I just saw their financial results were extraordinary. But I think what makes them truly extraordinary and the reason their financials are extraordinary is they're committed to a purpose that's worthy of loyalty, this purpose of enriching lives. This Net Promoter Score that you mentioned, I invented 20 years ago. As I was toying with names for it, I was thinking, well, it's really net lives enriched. 'Cause every time you touch a person's life, whether you're an individual, a team, or a company, you're either going to enrich that life or diminish it. And we need to keep track of that instead of just talk about it as an airy-fairy idea. And so, this idea of how likely you'd recommend us to a friend as the best way to know if you enriched a life, I mean, the logic is pretty clear. When you have your life enriched as a customer and you want to share that with a friend or a loved one, that referral is an act of love. It means you want to enrich the life that— Yeah. The person you know, you care about. And so it's a signal that an organization has indeed enriched a life.

So, you know, net lives enriched just seemed a little too soft and theoretical, I suppose, philosophical, and net promoter had a business ring, you know, promoters are customers who go out and, you know, they refer their friends, they buy more from you, they're your assets. And so net promoter score, became the name. I suppose in some settings I wish I'd left it at NetLives Enriched.

No, I think you made a good choice honestly, because it's, it's, it, like you said, it has a little business ring to it. NetLives Enriched sounds a little bit fluffy. So it turns out you actually hated surveys before you started MPS and you ended up launching a survey. But from my understanding, it just has 2 questions, or at least started with 2 questions. You alluded to one of them. What were the 2 questions and, and why did you choose those?

Well, I wanted, I, I'm so sick of surveys and these long market research things that, "Oh, we'll just take a minute of your time," and 80 questions later. If I had to have a survey at all, because I do think surveys take people's time, it's friction. So I wanted one question. And the question that was the best predictor of loyalty behaviors turned out to be likelihood to recommend, how likely would you recommend us to a friend? So 0 through 10, we asked that question. That score lets you know if you've created a promoter or enriched a life or a detractor or diminished a life. Then we have an open text verbatim follow-up to tell us why. And in the customer's own words, they can explain why you enrich the life or how you diminish their life. And people have to take the time to read that. Don't get artificial intelligence and delegate it to the statistics department or some computer. Read it. And the people who read it should feel the emotion of an enriched life or a diminished life. And good people care about that. Then my daughter convinced me, my daughter Jenny said, "Dad, we're using 3 questions, not 2." And I've seen great— question inflation has been a real issue.

12 becomes 20 becomes 100. I said, "Oh, Jenny, you can't do this to me." But she convinced me she had a question that deserves to be part of the canon. So she said, "Our promoters, they tell us why they love us in that verbatim text." But if we ask them, is there anything else we could have done to make your experience better? They tell you good ideas that can make you, can innovate and make you even stronger. And remember your promoters, they're your biggest fans. They want you to succeed. You're a part of their personal brand. 'Cause when you refer someone, you're sharing your personal identity, your reputation with the brand. It's a big deal. And those people care about you and they want you to succeed. So, Give them an option to give you their best ideas, but, but don't go past 3. There's just no way that customers should be answering 5 or 10 questions.

Yeah, I totally agree. I feel like you lose people at that point. So I know you were inspired by Andy Taylor, who was the founder of Enterprise Rent-A-Car. So I'd love to hear that story. What did you find so innovative and interesting when you were, I guess you spoke with Andy Taylor when you had a conversation with him.

Yeah. Andy has, has been a ex, he's been a supporter over the years and taught me a lot when I first met him, it was for my first book. I was trying to explain how his organization had grown from a tiny little leasing business in St. Louis, Missouri into the largest car rental company on earth as a private company. Talk about entrepreneurial success. He never had to go to Wall Street and get funny money and play that game. And he said, "Well, Fred, there's no magic." And he and I are both from the Midwest. So he's speaking in that real plain language of, You gotta treat your customers so they come back for more and bring their friends. And that simple idea, first of all, he inspired the Net Promoter Score 'cause he had a 2-question survey he was using with his branches in the rental car business. And I saw how powerful it could be. But the even more powerful thing was these words, back for more and bring their friends. Accounting does not measure that. Generally Accepted Accounting Principles just gloss over it. They look at total revenue. Mm-hmm. And what Andy is saying, you have to look customer by customer.

Are they expanding? Are they repeat purchasing, expanding their purchases? And are they referring their friends? And because we don't measure those with accounting, which is the yardstick we all use, and without intending it, entrepreneurs sort of take the mindset of accountants because they're using that measurement system for their major decisions and paying people. And suddenly, You have a worldview of accountants, which is how much money I can extract from a customer's wallet, as opposed to how can I treat them so well they come back for more and bring their friends.

I love that. Let's hold that thought for a second. I really wanna dig into that a bit later, but first I wanna set some more context. So I wanna talk about the 3 main, uh, parts of NPS in terms of how you evaluate customers. So there's promoters, there's passives, and detractors. Could you define that for us?

Yeah, we found that just in our early research, when you ask customers on a scale from 0 to 10, how likely to recommend us to a friend, those who score you a 9 or a 10, they tend to be the promoters who actually do refer you. They buy more stuff. They're your assets. 7s and 8s, they got what they paid for. They're passively satisfied. You didn't enrich their life. They got what they paid for. That's sort of a, you know, quid pro quo, nothing magic there. And then 0 through 6, you've diminished their life. Something was wrong. They won't recommend you. They'll actually tend to say bad things about you and feel like the instant there's an alternative, they'll jump on it, go to a competitor. So promoters, passive detractors became this simple categorization of success, you know, foul tip and failure. And when you keep track of that and get to the root cause of why, it lets organizations start to measure the right thing. Are we treating people in a way that enriches their life? And what do we need to do differently to improve our results?

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Yeah. And what would you say the telltale signs of a promoter are?

They put a smile on your face. A, a very successful entrepreneur. Truett Cathy, now deceased, but built Chick-fil-A into a powerhouse of a business. And Truett and I didn't have completely congruent points of view on some social issues and religious issues, but we were respectful, I think, of each other. And what I respected was he lived this notion of the golden rule, love thy neighbor as thyself. Southern Baptists, I'm told, have a their life's mission often is captured in a biblical verse, and his was Proverbs 22:11, "A good name is worth more than silver or gold," essentially. And so your reputation is everything. And I think in his mind, he said, "Putting smiles on people's faces, making them happy is how you build a reputation, how you live up to the golden rule." And that was the formula. That has created this monster success that continues to, and you know, run against these great companies like McDonald's and Burger King, but Chick-fil-A just blasts through them just the same way Enterprise Rent-A-Car blasted through Hertz and Avis and the others. There is a flywheel of once you get customers coming back for more and bringing their friends, that's the economic engine that drives prosperity, even though it's pretty much invisible to accountants except in the rearview mirror.

I totally agree. I have a social media agency, Yap Media, We haven't gotten any funding. It's been bootstrapped and it's all because of this flywheel effect of referrals. It's like my clients have a good experience. They tell their other, like, you know, very successful friends and it just, you know, helps us become the preeminent social media and podcast agency. Have you ever heard of, uh, Jay Abraham?

No, I don't think so.

He is a very famous marketer. He's a former YAF guest and he talks about this strategy of preeminence. And basically what it means is if you treat your customers well, if you've got the best reputation in the industry, you are like the preeminent prominent business, you're the number one hands down best choice, and you'll never have a problem getting customers. And he learned from one of his mentees, Tony Robbins, that you have to fall in love with your customers, not your products and your services. So I'd love for you to talk to us about loving your customers. You talk about loving your customers. It's a pretty rare word to use in business. So what are the ways that companies can love their customers and drive more promoters, more customer loyalty?

You wanna treat people the way you'd want a loved one treated. That's what makes the world a better place. That love is at the core. Love breeds loyalty. When customers feel loved, they come back for more and bring their friends. And they— that's what starts this economic flywheel. Love is hard to measure, but loyalty is pretty easy to measure if you're serious about it. Because in this digital age, you can watch how many of customers are repeating, how many are referring their friends. I mean, one of my recent investments is in a company that has a technology platform to help give and receive referrals. And I think that's what the world needs to do is referrals are everything. Instead of doing it on a survey, how likely are you to recommend? Let's keep track of real referrals because that's where the economic value is and that's where the reputation is. Mm-hmm. So, to your point, great businesses, and I agree with Robbins and Abraham, it's just that's where The, the, the most— that's the fusion right there that energizes success. And I think rather than kidding around with surveys, let's keep track of referrals.

And to your point, love is so important. When you love someone, you're gonna recommend the company that gave you that great service, that gave you that great experience. So it's not necessarily that they love your company. They love their friends and family so much that they're gonna recommend your company.

Absolutely, yeah. You know, people say they love their Apple computer. I think this is— but they also say they love their dachshund, they love their favorite ice cream. The love that actually energizes, inspires is this notion of enriching the lives you touch and your happiness deriving from that success. And people who live that life live a pretty good life. Even if they don't make a ton of money, they have made a difference in the world and will die proud. The notion that love is also behind business success, I think, is the radical proposition that I make in Winning on Purpose. And the evidence is really overwhelming. People don't read books anymore much, but this one has the evidence that the company who has earned the loyalty of their customers using NPS as a good proxy for that, measuring it, the highest NPS company in every industry we looked at has the highest total shareholder return over the decade. And you know, that's been a huge moneymaker for me as an investor. But I think it's even more the companies and boards of directors, investors, they gotta see the facts here. This flywheel we talked about, it's the only flywheel that keeps spinning through time.

100%. And to that point, you know, COVID hit, right? A black swan event. We had no idea what, you know, what the economic impact would be. Nobody saw it coming. And these things can happen. They happen every several years. So talk to us about how customer loyalty and having a high NPS score can kind of mitigate these black swan events.

Well, black swans have been going on for a long time. It feels like we have a flock of 'em landing in the last few years, but the, that's how the world works. And, um, the companies who have the financial mindset, that's very common today and running themselves into financing the accounting. And remember, accounting solves for profits. So very quickly, if you use general accepted accounting principles to run your business, which big companies almost have to, then you are teaching your people the purpose of your business is profits. And that's not a good purpose. That goes back to how much can we extract from our customers' wallets, as long as it's legal. That destroys energy. Good people don't commit themselves to that. Then if you can make loving your customers, this idea of making their lives better and keep track of progress there and recognize and reward people for earning 10s, real 10s, not begging for 10s, then I think you can manage your way to success. But I suppose the biggest challenge, almost every entrepreneur gets this intuitively, they can't succeed. They can't afford expensive advertising and crazy marketing promotions and big sales forces. They have to turn their customers into their sales force.

But as they get bigger, most companies flip over to the dark side where accounting rules the day and the purpose becomes profits.

Hmm. Yeah. You know, I think we should do a rebranding of NPS and call it Net Love Score. What do you think about that?

I, I even toyed with that in its early days, and that was, that was a step too far for me. In fact, even using the word love in business, I thought was a stretch. Until— I mean, think about it as a customer. If you had an organization or a team who was always watching out for your best interests and innovating and striving to put a smile on your face and make your life better, of course, you would go there all the— you'd give them all the business you had and you refer your friends. So, it's feeling the love as a customer that inspires loyalty and starts the flywheel spinning.

Okay, so my next question is how we can turn passives and detractors into promoters. What are the ways that you've seen work in the past?

Probably the earliest successes in the Net Promoter Movement were built around fixing detractors and the early adopters. NPS is an open-source system. I felt like it had a bigger chance of changing the world, a better chance if we made it free, everyone can use it, experiment with it. And because of that, companies like Apple grabbed it, Lego, great, you know, IBM, just thousands of companies experimented and helped it make, get better. And the mindset that clicked first was, gosh, when I see a detractor, I've got a quality problem, I have a defect. So zero defections, total quality management, let's close the loop with that customer, get to the root cause, fix it. Yeah. Do it at the right level of the organization, you know, don't do it at the headquarters, do it at the branch or the product where this issue occurred, so the learning is in the right place in the organization. That was phase 1. Where we are now is what innovations not only keep customers delighted, but raise the game so they are 9s or 10s and they're referring 10 friends, not just 2. So it's innovation. Yeah. And yes, passives, when you talk to a passive and you say, "What could we do better?" They go, "I don't know.

I'm happy, I got what I paid for." You have to be the innovator and get your promoters to give you interesting ideas. And think about the companies that you buy from for whom you're a promoter and what they did that was so remarkable that turned you into a referring engine. And experiment. And the cool thing about NPS as a survey is you can run these experiments without putting it out for the whole population. You can see what works. Amazon's very good at this. They run experiments. If it doesn't work, kill it. If it creates a lot of 10s and repeat purchases, roll it out around the world. That innovation, I think, needs to be energized. Step 1, Go find out when people are referring you, what is it they're saying about you? Get a real clear sense of what is remarkable, and then teach your organization that you can't rest on your laurels. Yeah, do more of that, but you have to come up with additional stuff. Amazon, great example. They did so many things right with the easy purchase and shopping cart and one click. But a few years ago, they said, "Oh, and when you want to return something," You don't have to put it back in its box and get the label.

Just take the thing and bring it to the UPS store and we'll take care of all that stuff and credit your money right away. It's like, you know, that kind of innovation is why they still have a crazy net promoter score high and why they continue to grow and prosper. And why, you know, people have legitimate issues, how they treat their people, all this waste and packaging. But at the core, Amazon's purpose is to make customers' lives better. And if their customers started saying, "Stop packing, you know, stop the cardboard wastage," they'd respond very quickly to it.

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I wanna take a sidetrack really quick because you brought something up that I, I meant to bring up in the beginning of the conversation, but we didn't talk about it. And that's the fact that you launched MPS as an open source software, which to me was just so interesting and I think pretty innovative back then when you did it. So talk to us about why you decided to launch it as open source. For those who may not know, some of my listeners are on the younger side. What is an open source software? What are the pros and cons of launching something like that?

Well, the classic open source software would be a, you know, Google's Android. And I think Wikipedia is a lovely example. These companies build themselves and let others innovate and build on top of them. And while there is a commercial model, there are people who package that software and make it easy to use and easy to understand. Red Hat is a classic example of a firm that has found out how to have a profitable commercial overlay, the core software itself, the core ideas, the IP are there for everyone to share. And in the case of Net Promoter, you have to have a license if you're using Net Promoter in your business. So if you're a survey firm and you're calculating Net Promoter Scores and using that, you have to pay Bain a small license fee. Mm-hmm. Uh, but the license fee is so modest, it's not a moneymaker. It just makes it clear that when you say Net Promoter, when you ask it 0 through 10, these things are constant and the brand gets protected. But for users who are just businesses that want to get feedback from their customer, it's free. Um, you might want to hire somebody who has software to do that really in an elegant way.

You might want to call people or send them a survey yourself. And I did it because at that point in my life, you know, do you wanna be a jillionaire or a quadruple jillionaire? Um, that's sort of stupid. Uh, do you wanna have a major impact on the world? That's what seemed energizing to me. And I thought we would have a bigger impact if we let everyone try it for free.

And from my understanding, you've done a lot of investments based on NPS score and, and the companies that are doing it right.

And we'll get into that later on in terms of the right and the wrong way. Right.

But The customers that are doing right, you tend to invest in those companies. Is there a way for other people to find out what companies have a true high, accurate NPS score?

If you're the target customer, you're the right age group and, and the right, uh, socioeconomic segment. And if you and your friends are just going crazy and referring it, chances are it's a very high net promoter score. So that's just a common sense way, I've had a little bit of an advantage because at Bain, as more and more of the organization at Bain has seen the power of net promoter and how difficult it is for individual companies to get net promoter scores that are comparable, apples to apples, because the instant you are the one asking for feedback, it biases which of your customers bother responding and what they say. So we've created Bain Prism and NPS Prism is a classic monstrously large panel for, I guess, probably a dozen different industries now that gets really accurate, really comparable NPS scores for every brand in the industry. And with that advantage, I invest in the leader. And if you take the companies that had the highest NPS in my previous book, "The Ultimate Question 2.0," I wrote with Rob Markey, I invested in those companies. My share— total shareholder returns over the decade after the book was published were higher than any mutual fund or ETF tracked by Morningstar, tracked higher than the lion's share of private equity firms.

And I had the liquidity and the low risk of just investing in public companies. The insight being I could shine a light on the flywheel of each competitor in an industry, and see which one had the best flywheel spinning, customers coming back for more and bringing their friends. And that has been, you know, it's tens of millions of dollars for me personally, and it's available to everyone. But shockingly, there is not yet a big movement to get on accurate NPS scores. The world is still in such an accounting mindset that there's still just a tiny minority of investors who see the power of it.

That's why I was shocked because I was like, well, why isn't there some sort of like, tracker that everybody knows about, like top NPS scores. And since there isn't, we've got like the godfather here. What are the top ones? What should we be investing in? What are you investing in?

Who's a recent one? Um, you know, NPS Prism, the most recent industry that they added was the, uh, grocery business. And the, the, the top score was a, uh, regional grocer called H-E-B down in Texas. But it's private. On the other hand, even though if you can't invest, you know where you want to have your kids go work. Chick-fil-A has the highest NPS. They're a private company. But I'd say then relatives who feel like entrepreneurs and want to be a store manager, then that's a wonderful career path. Trader Joe's is one of the top handful, but that too is owned by the next one in NPS is Aldi. Private still. Then you get Costco. All of these are at superstar levels.

It's so interesting that so many are private. It just goes to show that if you've got the flywheel effect, you don't need to take on investors. But keep going. Sorry for interrupting you.

Yeah. So, Costco's a public firm. I invested in Costco the instant I saw that they were top in NPS because my personal experience has been so positive. And I use them heavily as an example in Winning on Purpose, this last book. Their philosophy is customers come first, and they act in a way that makes it clear that they live their philosophy. There's a lot of stories about Costco that I really advise entrepreneurs to read. They've gone and, you know, they're one of the larger companies in the world today, and their formula works in China. It works everywhere, every kind of town. They're just crushing it, and they make people's lives better. I'll give a comparison. I bought an expensive Mercedes-Benz, great, just lovely car, except on my first trip to the airport, I was a little late, I was rushing, it threw its windshield wiper. And so I'm driving, trying to look through the passenger window to get to the airport without having an accident. I was very frustrated. And then when I went to get it fixed, they said it's my fault. I must have gone to one of those car washes dislodges the rubber blade.

And I'm thinking, what? And I had to— not just one, I had to buy two because these windshield wipers come in packs of two. $200. It just— and, and Mercedes uses NPS. They think they do. They're just so— but they're the, you know, they're, they're begging for scores and pleading. And, you know, if you can't give us a 10, call us.

Not—

Then I go Costco and I had a shaver, electric shaver, but forget the brand. It stopped working after 9 months. I said, "That's not right. This was an expensive shaver." So I took it back to the Costco store, not even the one I bought it at. And I said, "Listen, it's not working. Can you do anything for me?" And they looked, you know, they scanned it, they scanned my membership card, and they said, "Your account's been credited." I said, "Wow, no questions about what went wrong?" They said, "No, customer like you, if you're not happy with it, it's, you know, it's—" It's not right. And I thought, oh my gosh, one of the guys I know, there are quite a few billionaires that I know personally. And one of the early ones was Scott Cook, the founder of Intuit, TurboTax and QuickBooks and so forth. And his philosophy, he started at Bain about when I did, and then he left to found Intuit. He was the first adopter outside of Bain of Net Promoter. And he said, my philosophy is, We don't deserve a dollar of profit until our customer's happy. You think about what a high-minded philosophy that is, but it worked in software.

That's why he's still got a successful software firm. Most, 98% of the others, success stories back in his day, they're gone. Costco has the same philosophy. You're a good customer, and they have my track record as a customer. They know we buy a lot. You are unhappy with that product, then we don't deserve it, and the manufacturer doesn't deserve any profit. What an amazing common sense way to run a business.

Yeah, for sure. I mean, it's so important to have customer loyalty. So I have a story to share. I have the biggest blip that I ever made with Yap Media, my social agency. So I have a business partner, he owns 10% and he's totally the numbers guy. He's all financial, super smart guy, very successful. I'm very much like the relationship person. Most of my, uh, clients are actually former guests that become my clients and then they become my mentors and my friends and everything like that. And so my business partner is very much about the numbers and we've been growing really fast and, you know, our rates keep getting higher and higher and we have legacy clients that pay a lot less than our clients now. And so the biggest blip that I ever made in my company was when my executive team convinced me to reach out to all my legacy customers and try to raise the rates. And it messed up some of my relationships. We're fine now, but like it took a while to get it back on track. And it just goes to show that when, when you have legacy customers, these were these were clients that were with me for a couple years.

They referred all their friends. They were like my number one advocates. And for a period of time, they were mad at me for trying to raise the rates on them. Right. Because they felt like they were loyal. And so there is a problem with the way that people think in terms of like the accounting practices and just only looking at the numbers and the profits and not actually evaluating customer relationships. Cuz I sit in these finance meetings and I get so frustrated They're like, oh, like, you know, like if it's like some sort of like a negative forecast. And I'm like, but you guys don't know about all the conversations I'm having. And like, there's so much bubbling up that's just not calculated, you know? So I'd love for you to talk about, you know, what needs to change in terms of accounting practices and how entrepreneurs can avoid making the mistake of not measuring their, their customer loyalty.

It's an excellent question. And, uh, I've wrestled with that for a long time. I see people misusing Net Promoter. The way car dealers do, begging for scores. But with surveys, unless you have a big panel with double-blind research, you can't get honest, accurate comparable scores. What do we measure that really gets to the heart of customer love? In Winning on Purpose, I introduce a new metric that I think deserves to be the equal of net promoter. Maybe someday it's slight superior. It's called earned growth. And it just, it takes the point of view that you have with every customer, you have to keep track of, are they buying more or less or defecting? And are they referring friends? And so your earned growth is your total growth the business generates in revenue that comes from existing customers being happy and buying more and the friends they refer. Great companies will have earned growth rates 130, 140, 150%. So you think about their resting growth rate with no sales and marketing, they're just growing like crazy. I think for entrepreneurs and for the serious numbers people, force them to start measuring your earned growth rate and your earned growth component for every customer.

And you'll start focusing on the right things instead of aggregates like total revenue, which can lead you down the wrong path. Mm-hmm. If your customer is not buying more, coming back for more and bringing their friends, there's something wrong that needs attention. But if they are growing 150% a year, don't screw up the decision-making by kowtowing to the accounting mindset. Now, of course, you have to have cash flow to keep the business healthy. And so finance is vital, but it's not the purpose. And in too many businesses, finance, because we can measure it more rigorously, um, and report it and, and the, the regulatory system sort of gives it an edge. We give it way too much, uh, power in our thought process.

100%. And I would argue like that little blip, that story that I was telling you about when I went to go raise the rates with my customer, you know, we were trying to raise the rates so minimally, 20%. And I, I always tell my partners now, like, look, we did that. And we lost so many referrals. We could have grown, you know what we're doing amazing. So don't get the wrong picture, but like we could have grown even faster had we not lost all those referrals for that point in time while my customers were upset with me. So it's just such a cool tool. What's, what's the actual formula behind earned growth rate?

There's two components to earned growth. The, the first one is the, the back for more, uh, which encapsulates both retention, you know, cuz if somebody diminishes their business or defects, that nets out against it. And customers that expand their purchases, netting those things, there is an existing accounting metric called net revenue retention. That's the biggest component for most companies. And then you add the revenue from customers who came primarily as a result of referrals from existing customers. That set of revenue, that's earned growth. And if you are You know, if you're well above 100%, that means you've got the flywheel spinning in the right direction.

So if I've never done any paid ads, no marketing, and everything is referral, then that means I have a high earned growth rate?

The very best customer companies I've found have 70, 80, even 90% of their new customers are coming on referral primarily. That doesn't mean they don't advertise at all. You know, there's a lot of reinforcing, publicity and advertising, but the— you ask your customer, what's the primary reason you came aboard? If they say referral from a friend, or if you have a tech platform that actually it's clear our friend referred them and keeps track of it, those are the best kind of business you can possibly have. Those are the assets the accountants don't measure today, and they send you down the wrong path because of that.

I feel like this is so educational and interesting and helpful for all the entrepreneurs that are out there. So question for you, something like a podcast, right? Nowadays, podcasts can be a lead generation tool for, for people. Similarly, like having like a webinar where you invite potential clients. Would you consider that being referral-based business or would you consider that being more of like paid promotion?

It's on the edge. You know, if you're educating people about what you stand for and what your philosophy is, it's a way of communicating the truth to them. It's not quite as good as an existing customer who really knows you and isn't— it's not what you say about you, it's what their experience has been and what they say about you. That's the highest form of positive marketing. But I think this, what you're describing with podcasts and building community, it's the next best thing.

Yeah, I agree. I feel like it's like slightly right under is like having like a social media platform where you're known as a thought leader and you're giving away free advice or a podcast where you're building trust with someone. It's not quite paid promotion. It's, it's sort of like the gray area, right?

Well, and you know, I think reviews are even a step further down. If you could get really honest reviews on these sites and curated a little bit. So it's the customers that you care about, but it's even Amazon. Who is so strong, it's sloppy. When you go in there, the star ratings, they don't make much difference 'cause you know that, what, half of those are paid in some way or cheating. So yeah, you can read the verbatims and sort of figure out who thinks like me and you can get benefit. But if people really cared about review sites, they could be so much better than they are today.

Yeah.

And a really smart, somebody who runs one of the biggest retailers in the world, said, "Fred, we don't get the best insights from our NPS surveys. They're good, but they know they're talking to us, so there are social barriers about telling the truth and not hurting our feelings, or maybe they're negotiating with us. You know, there are a lot of biases there. The way we get to the truth is to listen to our customers talking to other customers or people they're referring on Facebook groups or in some third-party platform." Mm-hmm. So, the real truth is listening in on what people are saying about you in a way that's not creepy and inappropriate. But if you can have an honest way of listening to that, boy, you can learn a lot.

So, are you alluding to like social listening and kind of doing research about what people are saying on social media sites or something different?

I would say it's, yeah, when there are message boards of customers talking to customers and it is public space, so you're, you know, you're allowed in there, that's really powerful. But I also think there are the emerging tech platforms, and the one that I'm most excited about is called Mention.me. They are asking people, if you're going to refer, if you'll do it this way, we'll make it worth your while with a small donation to charity or something that you'll care about. It's not a bribe. And we're going to give a warm welcome to the person you're referring. Once again, it's not a bribe, but it's an appropriate— It's not a bribe. Recognition. They're finding who is really making referrals there and what they're saying. So if you take that verbatim comment of, you know, why I'm referring to a friend, why, and you read that comment, that's the goal. That is what in the customer's eyes and their words, it makes you remarkable and makes you something they think would enrich the life of their—

Well, you're definitely making me feel encouraged to send out some sort of an NPS survey to my, uh, clients. So I'm excited about that. Let's move on to your latest book, Winning on Purpose. You ended up writing it after you got diagnosed with cancer. So I'd love to understand why you were inspired to write this book, and we've covered a few topics that are in it, but tell us about what people can find in this book.

Yeah. When you don't know how many, uh, months you've got to live, and when that, when I got the diagnosis, it was one of those. You know, you'll probably make it, Fred, but, you know, there's a 20 or 30% chance you won't be around in another year or two. And so you think, what do I need to get accomplished while I'm— um, and for me, there were so many people misusing net promoter. Two-thirds more— two— at least two-thirds of the world's large companies use net promoter or say they do, but they're using it the wrong way. They don't understand this philosophy. It's just It's a KPI like a handful of others. And I had to get across this idea that no, no, it's a whole philosophy. It's, you know, go back to the days of the world thought of it was an Earth-centered solar system and you had all these crazy theories about the sun rotating around the Earth. And then Copernicus and a handful of others said, no, it's the sun is the center and proved it. Yeah. I believe the customer is the center of the solar system. And we don't— most people don't agree with that yet.

And so, Winning On Purpose said, "No, the winning purpose, the only winning purpose is to commit your organization to making your customers' lives better and loving customers." So, only 10% of businesses, big businesses believe that today. So, it's a radical proposition. Yeah. But Copernicus was a radical proposition. He was right. I think I'm right, but time will tell. Will most business people come over to this point of view that customers, it's not just all stakeholders, it's not maximize shareholder value, the purpose of the business is to make my customers' lives better. And if I do that, then I can make my employees happy because they have a life of meaning and purpose. And they're part of the flywheel that generates superior economics. And of course, our investors are better off because of that. But man, customers have to come first. And whether it's Apple or Costco or Lego or Bain Company, every great business I know has customer front and center and systems to reinforce that. Because you know you're fighting against the current of financial accounting, which points you in a different direction.

I want to go deep on one aspect of this because I feel like a lot of people are under the mindset that in employees is where it starts, right? Employees are the priority. Happy employees equals happy customers. We hear this all the time. Why do you feel like it starts, like the purpose of business is to enrich the lives of the customer and not necessarily that it starts first with employees?

There's a lot of things that make employees happy that make customers very unhappy. You know, I don't wanna work long hours. I don't wanna take on the tough count. If I see a grumpy customer coming in the store, I'll go to the bathroom and let somebody else take care of And if you don't have your employees inspired to find ways to delight customers and make their life better, not only will it be financially unsuccessful, but you're putting them in a position of being selfish. And great leaders help show the power of love. So, the leader's primary responsibility isn't to make the customers happy, it's to inspire their teams to take on that mission, embrace that mission of loving customers and help them succeed. And when they do, make sure they get the appropriate recognition and rewards. Don't create a compensation system that makes salesmen rich for overpromising and selling a lot of new business that never turns into customer promoters who come back for more and bring their friends and therefore never become a true asset to the business. See, you got to really rethink compensation, hiring, promotion. At Bain, you can't— it's very hard to get promoted at Bain unless your team thinks you live the values of the company and make our clients succeed.

We have built systems that reinforce that. And if you just look at— Bain is always on the top, whether you pick Glassdoor, Fortune, pick your list, Bain has been at the top. Why? Because all of the reinforcing systems of who we hire, how we train, how we run huddles on a weekly basis, how you get promoted, it has customer value first. And I think no leader is doing their employees a favor if they don't help them understand that their happiness, their employees' happiness, is based on making a meaningful contribution that the team values in making customers—

Well, Fred, this is such an awesome conversation. To kind of round this out, and I have a couple last questions that I ask at the end that I ask all my guests, but to round out this portion of the conversation, you know, you've been doing NPS for 20 years. You've had the privilege of studying so many really well-known businesses. What are the top business lessons that you've learned in your career?

At the end of the book, I sort of pull back the curtain and make it clear that this is actually life advice that I'm trying to give to my grandchildren who are, who are too young to read the book at this point. But, you know, if you believe this mindset and you wanna make the world a better place, It's really hard to do that on your own. You have to team up with others who have similar values, principles, and team up and find a way to help them succeed in living that mission and making it the truth and making it the common practice. So choose the people you hang with really carefully. Don't just hire them because they'll make you money. Make sure these are people— Yeah. People who are going to be meaningfully contributing to teams who are committed to enriching customer lives and who feel like this golden rule idea of love thy neighbor is the center of a well-lived life and purpose. Because, you know, in the end, your loyalties to the people and the principles that they live, and I think, you know, yes, loyalties are to individual people, but loyalty has to be based on how they embody the principles that you believe are central to a well-lived life and your purpose.

Those loyalties, they just define your legacy and they certainly shape your life. Be thoughtful and be loyal. When you found that, you know, why am I staying 50— well, not quite 50 years, but It's a group that I feel is helping make the world better. And there's nothing better you can do with your life than being connected to those kinds of teams and those organizations. And don't take crappy profit-based purpose as a customer, as an investor. You know, there's so much talk about environmental investing and pollution has to stop. But seriously, the worst kind of pollution are people mistreating each other and abusing each other. In the name of profit.

I completely agree. So I asked some questions at the end of each episode that, and we do some fun stuff at the end of the year with them. So the first question is, what is one actionable thing that our Young and Profits can do today to be more profiting tomorrow?

Get a sample of your new customers and ask 'em, uh, why they came on board. And for those that said it's a referral, find out who referred them. Um, what it was about what they said that make that referral so impactful. And then go talk to the person who referred and understand what made them so confident in you that they would co-brand their reputation. Get a root cause set of conversations there. I think that's the most important thing to do. And then make sure your teams feel the responsibility to be remarkable, that their job isn't just to get somebody off the phone on time or to— Yeah. Make them sort of happy enough to not be a problem. The job is to do something remarkable that they're going to talk about with their friends. And that's a high standard, but then your people have to help put pressure back on you to let you know what they need in terms of systems and resources and support training tools. That once you get your employees feeling like our job is to enrich the lives we touch and we measure our success that way, One of the things that I am gonna make this mandatory listening for all of my 60 employees and my executive team so that they know what our priorities here are at YAP.

So our final question here is, what is your secret to profiting in life?

Have grandchildren and have 'em visit a lot.

And where can our listeners go to learn more about you and everything that you do?

Net Promoter System, uh, is a website that has a lot of tools and resources. And just search on Winning on Purpose, and you'll start seeing the things that we're developing. 'Cause I still do have this open-source philosophy that I want more people to understand this purpose and to put it in practice. And today, it's still a radical philosophy. So, go to those two sites or on LinkedIn, there's a newsletter I do on LinkedIn called Customer Obsession that I think is a pretty good dose. I'd like to see teams talking about that one each month. To see what, uh, what lessons there are for them.

Awesome. Well, I'm a big fan of LinkedIn. I'll make sure I follow you on there. We're gonna stick all your links in the show notes, your book, all your social sites, your websites. Thank you so much, Fred. This was an awesome conversation.

It was my pleasure. Thank you.