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Earned growth: a new customer satisfaction index complementary to the NPS
The reductive use of the NPS as a mere statistical measure of a company's advocacy, won’t bring much value. That’s why the creator of the NPS introduced a new index.
As the global economic scenarios are changing drastically, businesses are struggling to meet and exceed evolving customer expectations. It is now vital to convert the customers to enthusiast promoters to drive the business growth.
Since its inception in 2003, the Net Promoter Score (NPS) has become the most widely used metric for measuring customer satisfaction and a pillar for customer experience management projects.
As it became popular, many companies started to use this metric as a KPI for internal performances, but they ultimately realized that even with a great NPS score, sometimes they kept receiving complaints from customers. In fact, the reductive use of the NPS as a mere statistical measure of a company's advocacy, won’t bring much value. That’s why in his new book "Winning on Purpose," the creator of the NPS, Frederick Reichheld, introduced a new index that can account for loyalty-based growth: the Earned Growth.
What is NPS, what does it measure, what are its limitations?
Net Promoter Score is a metric of customer satisfaction.
To calculate the NPS, companies qualify customers through a questionnaire that measures how likely they are to recommend the brand to others (on a scale from 1 to 10):
The promoters: those users who are highly satisfied with their experience and recommend the brand to others (they assign a score from 9 to 10).
The passives: those who are moderately satisfied, but might still switch to the competitor (score from 7 to 8).
The detractors: they are dissatisfied and disappointed, will not only abandon the brand but will also speak negatively of it (score from 0 to 6).
The formula is easy: you simply subtract the percentage of detractors from the percentage of promoters. Fred Reichheld emphasized that NPS data is meaningful when it translates into action aimed at improving the customer experience and does not remain, on the contrary, a mere statistical measure of a company's advocacy.
When this happens, the company wins more loyal customers, who are likely to buy more and, not least, more likely to refer friends and family to the brand.
Unfortunately, however, as this metric has become more popular, most companies have also become highly concerned with the score they get. They try to influence the score rather than trying to serve their customers better. It is more ineffective where this metric is just a KPI for assessing internal performance and bonus calculation, especially for the departments which are closer to customers. Due to these issues, the actual purpose of calculating NPS is not that meaningful in the present scenario.
The introduction of the "earned growth"
The reductive use of the NPS prompted Fred Reichheld to develop a new metric: earned growth. The aim is to measure the growth a company can achieve through improved customer satisfaction.
Fred Reichheld performed a test to get earned growth and referral rates and found that for some companies, the customer referrals worked amazingly and increased new customer flow by 90%.
Earned growth: what it measures, a complementary tool
The "Earned Growth Rate" is considered complementary to the NPS methodology. It is a new form of measuring loyalty-based growth. While the Net Promoter Score measures how well a company can positively surprise customers by turning them into promoters, Earned Growth measures the percentage of a company's growth derived from this ability.
Currently, organizations do not have any measurement procedure of how much business is coming from the existing customer that does regular dealing with the business or performed business in the past. The concept of Earned growth is to measure this gap. This idea is helpful to measure the promoters as well as the financial improvements due to happy customers and referrals. The measurement process consists of two components:
Net revenue retention (NRR): it is the measurement of the revenue percentage the organization can still make from the past year's customers.
Earned new customers (ENC): it is the revenue that gets generated by earned VS bought customers. Earned customers are those buyers who consider after listening to the great experience of other clients. In contrast, bought customers come from branding, marketing campaigns, and promotions.
Adding the NRR and ENC together and subtracting 100% gives the Earned Growth rate. Let’s look at an example from Harvard Business Review:
The NPS is not enough anymore, but the good news is there’s a complementary metric to measure the tangible effects of customer satisfaction. Combining the two concepts, Net Promoter Score and Earned Growth, can bring more insight into the customers' experience quotient and help companies take corrective measures.If you are interested to know more about how it can be applied to your company, don’t miss the opportunity to speak to one of our consultants.