Fred Reichheld on the Importance of Customer Love

Fred Reichheld on the Importance of Customer Love

For those that do not know Fred, the 0.01% of you are probably listening, Fred has been, is the creator of the Net Promoter System, which many of you all of all probably heard of the Net Promoter Score. He’s, uh, currently a Bain fellow who’s been with Bain for over 45 years. He’s written several books and, um, we’re gonna talk about his most recent book, winning On Purpose as well.

Fred, thank you so much for joining us on B. Customer led. Great to be here, bill. Excellent. I’m really excited to, To get into the question set with you, Fred, but you know, we ask every guest, just kind of, you know, tell us sort of just, you know, quickly or as far back as you want to go, frankly, just your professional journey and what you think were those differentiating markers for you in your career.

They didn’t need access to the funny money of the Wall Street capital markets. And finally, we figured out that that loyalty was at the core of financial prosperity. And that has been my focus since, since the very early days. I initial. Was shocked by the economics, but today I’m shocked by the philosophy of life that the leaders have that differentiates them and lets this all become possible.

That’s

But I have to ask you, because there is a lot of conversation as you have seen yourself, uh, and we’ve talked about this a little bit, is why do people botch nps? I mean, it’s one of the most simple things, frankly, out there, but like, why do you think people are, are botching it or even just kind of poo-pooed on some level?

It might happen right away. It might just take a couple, two or three. Gaming manipulation. Uh, I don’t really care about the customer. I just care about getting the score, and that is selfish. It, it’s the opposite of the net promoter philosophy, which brings us to the, the bigger reason I think people mess up is Net Promoter is about a framework of, uh, business that presumes the primary purpose is to make customers’ lives.

And most companies don’t stop and think, do I really agree with that? Actually today, 90% of companies wouldn’t agree with that. So let’s be more serious. If you just think customer centricity is one of a dozen things you ought to be doing, then you are not really living the net promoter system. Uh, if you think it’s one of a handful, you’re getting closer, but as I argue in winning on.

The primary purpose of the great businesses is enriching the lives of customers. And the leader’s job is to inspire their teams to follow and achieve that mission. And that’s way different than financial capitalist system measuring a quarterly accounting earnings. And the what I finally, this was years and years ago, Andy Taylor, the CEO of Enterprise Rent a Car.

I asked him, how did you, this is a miracle. It’s here, you know, broken all the economic rules. I learned in. What a waste of money that was. So how did you, you know, and he is, and the family is worth tens of billions of dollars. How do you do it? And he said, well, Fred, there’s only one way to grow a profitable business.

You treat your customers so they come back for more and bring their friends. And I heard that 20 or 30 years ago, and I sort of heard it and, and I, it was at Andy, at at Enterprise that I saw this two question survey idea, helping get control of this notion of making customers. But what I missed was back for more and bring your friends.

Mm-hmm. , that is the flywheel and accounting does not measure it. What I didn’t recognize quickly enough is our generally accepted accounting principles do not tell you how much of your growth is coming from customers coming back for more. Yeah. Or referring their friends and. Is it’s death. If you can’t, if you can’t quantify the core flywheel that drives prosperity, good luck at getting making the right

I’m a Hughes Enterprise fan because, I mean, even I had to rent a car from Enterprise not too long ago, maybe two months ago, and I got a call the first day when I rented it to make sure that everything was going well by the store manager, and then it was a four day rental. On the third day. They said, Hey, we just wanna just check and make sure everything’s going.

Right. Like nobody does that. Nobody

That’s right. And the goal. Branch manager is to maximize the profits of that rental to you, which makes ’em do things that gouge or cut costs and cut corners. It’s just, it’s a philosophical difference and that’s what I think I missed or I underestimated all these years. The great companies are trying to figure out how to give the customer the best value possible and the rest of ’em are trying to figure out how can I extract maximum value from that customer’s pocket.

That’s

You’ve got this word love and the title. You’ve got it throughout the book. It’s an incredibly strong word you do not hear much of in business, frankly. Why is now the right time for that word to be used in business and actually people being okay with saying, we’ve gotta love our customers.

And this notion of love, th neighbor as thyself is the religious one, but, Treat people the way you’d want, a loved one treated. That’s the highest standard in human affairs. And the more a leader can put his or her teams in a position to live up to that highest standard in human affairs to love their customers, that the better the community becomes.

And what I, I’m most proud of in the book is that we demonstrate how that soft notion of love actually. Economic, uh, success and the guys that win for their investors and their employees and everybody else financially are the ones who, uh, best love their customers. And I did live, one of the guys at Bain is good with, uh, word count things.

So he took the book and he, it turns out I used the word customer over a thousand times in this last book. And the word love is in there about 300 times. Yeah. So it’s not just once or twice. It is the seminal idea. That I think is animates the net promoter philosophy.

I did. I searched client, customer, and love by the way. And it’s there, the numbers are there for real. I used to work for someone at at chase gentleman by the name of Mike Wach. He’s now, he was heading the home lending business at Chase and has since moved to Wells, uh, to a bigger role. And he would always say, don’t be right.

Do what? Meaning like just cuz the policy is some policy, do what’s right for the customer.

And winning on purpose is about the golden role. Yeah. Because so many people have just a superficial understanding of it and don’t recognize, you know, it’s just not you and the customer. It’s you and the customer and the communities that you’re both part of that need to be a stronger and it, you know, otherwise it devolves into cronyism and back scratching and horrible.

So your less than a 10 score never showed up in the sample. That’s right. That created the score for them.

So that’s why we based a system on it. Over the years, I’ve come to understand better why recommend is such a special thing. Cause people just don’t recommend and co-brand their personal reputation. Mm-hmm. with a product or a brand, unless it’s not only best value economically, but this has to be something you’re proud to be associated with.

It can’t be a company that abuses its employees. Or cheats its investors or, or even cheats on his taxes or pollutes the environment. So recommend, it’s an act of love that I’ve had my life enriched so much. I wanna share that with someone I care about. So I’m extending that love to or that referral to a friend or family member and that act.

So referral is active love is the way to think about. And we just do not track that in business. Everybody sort of nods their heads and says, oh yeah, the Bible says, you know, your, your reputation is everything. And I agree with that, but we don’t measure it. Although we’re starting to, at one of the companies that I’m working with most closely Keep is a pla, a tech platform that keeps, that makes it easy to refer people through the platform so you can actually keep track of who’s referring whom and get a sense of.

The economics of it and closed loop analysis of mm-hmm. what needs to be done better. So I think that actually is the frontier, but it’s also the hi, the beginnings of it, right? Recommend to a friend is the ultimate act of love. And it’s the a and it’s the best way to get a sense of, have you enriched someone’s life in a remarkable way.

Um,

At the end of the day, still,

What are you seeing? What kind of examples could you share? The

And that sounds lovely. And it’s just complete crap. You know, the world doesn’t work that way. The world works by priorities and systems of, uh, you know, the compound interest brilliance is, is what drives, uh, progress. And the great companies I see say, of course everyone needs to, you treat everyone according to Golden Rule.

But the reason our business exists, its primary purpose is to make customers’ lives better. And I, as a leader, my job is to help my teams understand that and embrace that mission and love those customers and innovate and find ways to, to make customers lives. And that makes their lives better. Cuz you know what, what’s the best gift you could give to your employee to put them in a position where they can earn a meaning, a life of meaning and purpose through service to others that gets recognized and rewarded by teammates.

And so that’s, it’s a system with loving customers as the objective, as opposed to this static model of, oh, I’ve got a balance scorecard of, uh, lots of stakeholders and I need to keep ’em all. It’s just one works and one doesn’t.

They’re empowered, they’re able to deliver in the way that you’re talking about, that creates happy customers who are giving more business to that company. Employees want to be working for companies that are winning. And that just, it’s just a sort of almost circle of life and proud

Yeah. So the more you can put them on a course to act in a way that makes ’em proud and inspir. And win, which is part of this, you know, you can’t lose, lose, lose and be nice to everybody that doesn’t work out either lives better. But this, uh, the thing I was surprised by in the research we did for winning on purpose, we did not find one industry where the, uh, the company with the highest net promoter score correctly measured versus competitors wasn’t also the total shareholder return king.

And that relationship between return to investor over a decade. Being 50, 60% of the difference in total shareholder returns was being explained by relative NPS across each industry. That’s a power. I mean, that’s mindboggling, and no one knew that. No one had evidence that that was the case.

I mean, that’s in my role, you know, with Medallia. You know, I get to talk to companies all the time. We talk about the power of NPS and the system and putting it into practice and what that does from a financial perspective. There have been CFOs whose eyes kind of pop open like backhoe tires, the size of backhoe tires, right?

Because they see it and they say, when, you know, why haven’t we been doing this and when can we put this system into

You know, how does a standard financial capitalist company think about purpose? Mm-hmm. , well, they think of maximize shareholder. I think to be great, you have to have purpose as loving customers, making their lives better. How do I measure progress? Well, in traditional financial company, I use my gap, financials and, and profit.

And as I said earlier, that doesn’t measure back for more and bring our friends, which are the, the real behaviors. Yeah. And so the great companies are measuring share of wallet, repeat, purchase, and NPS as an. But don’t think that NPS is the goal. That’s a survey. The goal is behaviors of people coming back for more and referring their friends and all the way down to how do I grow my business?

In the classic company, I hire sales people, I have marketing advertising. That’s how I grow, uh, promotions in a great customer capitalist. I have to delight my customers and turn them into my sales force. So I put my energy and innovation not into sales practices, but into delighting my customers in such remarkable ways that they refer their friends all the way down to what’s my job as a leader.

I think in a financial company, it’s my purpose is take care of my shareholders. Yeah. In know cap customer capitalist company. It is to make my teams lives better. To help my teams lead. Great. And great lives means lives of meaning and purpose that are, that love customers in a way that they actually feel it.

So everything needs to change, and that’s a multi-year process. That’s not to say that putting an NPS system and a metrics isn’t extraordinarily important and you know, it’s, it can be the spine off of which these other things are evaluated, but it’s hard and, and people don’t understand mindset. It’s like asking the fish to describe water when they’ve never been outside.

Necessarily, but can you tell our audience, uh, about that and how that kind of

They said, look, it, it’s an important idea. What do I measure instead? Yeah. And I thought hard about that. And I think the right answer is, will you measure the behaviors in this digital world? There is no excuse for not measuring back for more and bring their friends as the metric of accountability. That is the truth.

NPS shines a light on the truth, but the truth is back for more and bring their friends. Mm-hmm. . And so earn growth is simply the accounting or the auditable metric of, for your business. What, how much of your growth is expanded? Purchases from existing customers, net of their declines and defects, and there’s a name for that.

In the real world, it’s net revenue retention. So I want every company to focus on net revenue retention. Plus the second component of earned growth is new customers who are coming primarily as a result of a referral from an existing customer. That’s the earned growth. Those two things together, and it’s harder to measure than meets the eye.

There’s nuances, you know, if I’m a bank, do I measure loans to employees, do I measure refinancings? And you know, you gotta work out these details to have a metric, just like the accountants have to work out a lot more detail. But it’s worth the effort because eventually I think that is what boards of directors ought to be holding executives accountable for, not accounting growth.

I can get that by buying growth, which often ends up being destroying the future because you’re bringing in lower caliber customers for the wrong reasons, with the wrong expectations, big loan losses and big claims hidden in this group of bought customers. So you’re you really? Just destroying the future.

If you’re moving from earned growth to bought growth, and most big companies are in that trap today. They feel they must meet a growth objective. That’s what Wall Street needs. Mm-hmm. . We’re gonna meet that growth objective and they are cheating and buying it in ways that are essentially destroying their future.

They’re a member of the s and p 500 and huge success story. But First Republic showed me that they keep track of, of our loan growth, our loan origination. About 90% of that growth comes from existing customers expanding their, uh, borrowings and their referrals. And then when I, how do you do that? Well, when a new customer comes in, we ask ’em, what’s the primary reason you joined us?

And we make sure that we have the systems to keep track of, uh, by customer, by family. What are, what’s the loan balances? Now that they track it, I can see, oh my, Something like 70% of their brand new customers are coming through referral as the primary reason. And a typical bank is more like 10%. Yeah. 20% of their cus new customers are referrals.

And then I happen to know from working with banks and insurance companies for many years, that customers who come in on referral have far better loan loss and claims than an average customer. Mm-hmm. . But because companies don’t track this, they don’t. So I’m thinking, oh my goodness. No wonder First Republic has got this incredible track record of growth, profitable growth, and, and no big loan loss explosions, even though they’re growing at over 20% a year when the industry’s growing loans at 4%.

Yeah. To a financial minded regulator or investor that would spell trouble. Say, Hey, these guys are buying their growth. You know, look out, they’re gonna have a loan loss explosion. Because they’re 90% earned growth that shows you how they’re getting their growth far in excess of the market, not by dropping credit standards, it’s by loving their customers.

And so I see this in Costco in the, uh, warehouse area I see in Chick-fil-A and restaurants Discover Card in the credit card business. And you know, the book is full of examples, winning on purpose. It’s a radical book. I had to have dozens and dozens of examples to prove it, or people would think I’m a nut

Like how do you. Going down this path outside of getting your book and reading it, that’s certainly step one, but maybe what’s step two?

And then what are we doing that’s inconsistent with the ideas in this chapter or this. That we should challenge and, and reconsider. Cuz I think that’s what leaders need to hear is yes, from customers, but we’ve been surveying customers forever. Mm-hmm. employees have a better sense of the reality of the economics, what’s feasible, and ask them what is it we need to change to live up to this standard of loving our customers?

And we can’t do it instantly, but we can certainly lay out a path over the next five years that’ll get us there. And I, I see those teams being. It unleashes energy cuz they always wanted to live this kind of life. Mm-hmm. . But it means a leadership team who is courageous cuz they’ve gotta educate their board of directors as well to the realities of the economics.

And I’d say the smartest CEOs are making sure their board has read at least the investor chapter and either agrees or disagrees, but have that conversation. The evidence is, is over. Get them behind you before you do anything too extreme. But for heaven’s sakes, get your employees into the conversation. I see so many people ignoring what the employees know and going straight to customers.

And customers are sick of surveys, right? Mm-hmm. that I don’t answer surveys anymore, but if an employee and it’s real, I obviously ask, I answer employee surveys. Yeah. That’s where the goal is, I believe, for today. Great,

It’s actually been some really interesting questions. The individual that I, I won’t mention the name, but the individual that I interviewed last time, she comes from a FinTech product. She’s a FinTech product leader, uh, at a global FinTech player in the payment. She’s created what is really cool, which is the, this concept of a two hour sprint, um, and is actually now coaches, product leaders and Tesla and Apple and others on the, on this process, she wanted me to ask you, how do you overcome situations where your stakeholders are not in agreement on a solution to a problem?

And I think your book is just a great backdrop in what you just said even would be a great backdrop to that.

And the facts that resolve most, uh, differences probably have to do with a belief that the only way to succeed is to delight customer. . And if that’s the true objective of every stakeholder should be working together toward customer delight, that framework lets you think about the right choice. And to make it practical, I’ll tell you what Costco does in their major meetings and decisions and priorities.

Somebody always says what’s in it for the customer? Mm-hmm. . And if you can’t give a good answer, your idea is dis.

Well,

Cause then I say, and how did it make you feel when, when you felt so good about a business or a thing that it, you shared the love and that source of, you know, what’s wrong with financial view of the world? Is financials a fiction? It’s just made up by accountants, human energy and wisdom, but that’s what drives everything The.

And then, so what you’re really tapping into with that question is, but what created that energy, that love, and how did it make you feel? And, and they’ll start thinking about, wow, that’s like free growth for a vi free new customers. We all need that in a recession, and I, I believe all of our employees need to be thinking that way.

Who’s delighting me in my life today? And how can I learn from that and put it into my own daily

So you have wow, you know, millions of years, uh, as well as what you’re doing right now with, uh, with plants and, and it’s thinking in that context, how can I make the world better in a practical way? That’s an inspiring thing for me. And then there’s a, up on the hill above the garden, there’s a huge bell.

It’s the same size as the Liberty Bell in Philadelphia, but it’s the loyalty bell. And, and the ultimate thing is, you know, with the freedom of resources and the wisdom we’ve gained, what are the principles, the people, the what is worthy of our loyalty? Cuz loyalty in the end is really self. And you have to figure out what your life is.

What are you gonna commit to and be willing to invest in? And that understanding your loyalty is, is I think what, what helps all of us lead better lives. You know, in the book I say this for my grandchildren, I hope they understand that idea that the world is pretty screwed up in how it thinks about winning and, and responsibility and loving.

But you’ll know by, uh, choose your loyalties wisely. They, they guide your light and de define your legacy for

Oh, you can still have bells made . And so I had to make it to the same dimensions as the Liberty Bell with this idea in mind that bells are such a cool symbol. You know, when you ring that thing, you can hear it for miles, and it does have this sort of sacred connotation. There’s something special about a bell ringing that, uh, that I, I like that, that symbolism.

It’s celebration, but it’s all, I mean, bell’s tolling for funerals, it’s, it, it’s for something special, for something sacred. Mm-hmm. . And I think, you know, if you’re bringing a new customer in, uh, for on the right terms as a. Ringing a bell is a wonderful symbol. Yep. If you just sort of pitched them way beyond your capabilities delivered then, then I would keep that bell.

Quiet

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