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Published in May 2023

I’m still busy reading HBR’s 10 Must Reads 2023: The Definitive Management Ideas of the Year from Harvard Business Review (on Amazon). The good thing about such a collection is that every chapter presents a new and different paper. And I do find many of the papers do include something, that I find useful to know.

Many people will have heard of the so called ”Net Promoter Score”. Nothing new or exciting. Recently, some people at the global consultancy Bain & Company came up with an improvement they called Net Promoter 3.0. With the objective to make NPS more useful for business decision-making, their concept is to add one (or two) new metrics to the mix: “Earned Growth” and ”Earned Growth Rate“.

But first, they start with some general background:

“It gauges how consistently a firm turns customers into advocates, by tracking and analyzing three segments: promoters, customers who are so pleased with their experience that they recommend your brand to others; passives, customers who feel they got what they paid for but nothing more and who are not loyal assets with lasting value; and detractors, customers who are disappointed with their experience and harm the firm’s growth and reputation.”

Sounds easy and like a good idea? Sure, understanding your customers is useful. But how often have you already been asked to rate a product or service, with some incentive to give a high score, no matter how happy you actually are? And that’s why NPS isn’t quite as reliable as it should be in a perfect world, where everbody provides objective and honest scores all the time.

“Unfortunately, self-reported scores and misinterpretations of the NPS framework have sown confusion and diminished its credibility. Inexperienced practitioners abused it by doing things like linking Net Promoter Scores to bonuses for frontline employees, which made them care more about their scores than about learning to better serve customers.”

Obviosuly, this approach is likely to create a big motivation to generate high scores, nothing else:

”[…] some firms have turned Net Promoter Scores into vanity statistics that damage the credibility of NPS.”

To address this issue, the people behind NPS had a new idea: make it a finanical metric instead! (Because they are always reliable and never tampered with in any way…)

“Over time we realized that the only way to make the system work better was to develop a complementary metric that drew on accounting results, not on surveys.”

”[…] develop a new metric, earned growth rate, which measures the revenue growth generated by returning customers and their referrals”

As it happens, some examples age better than others. I’ve noticed that in a couple of papers over the past few years, that some stellar examples in the papers turn out to be much less impressive as case studies just a few years later.

So, in 2021, one of the test cases for the new innovative metric was First Republic Bank. They explain: “The primary reason First Republic collects this data is to prove to investors (and regulators) that its rapid growth is safe and high quality.”

In 2021, First Republic was an American bank, that probably not many people outside the US knew. That changed in 2023. If the Wikipedia article starts in the past tense, that’s a first indication that maybe not everything is going so great. (Or maybe it is and they have been acquired at an amazing valuation?!)
Following some turmoil in the banking sector, again, JP Morgan took over what was left of First Republic. Not sure I would trust any of their metrics.

Anyway, back to NPS! Because now the paper gets interesting, as it explains what the earned growth rate actually means:

“Earned growth has two elements. The first is the back-for-more component captured by a battle-tested statistic called net revenue retention (NRR), which is used in several industries, most notably software-as-a-service (SaaS).”
“The second component is earned new customers (ENC). It is the percentage of spending from new customers you’ve earned through referrals (as opposed to bought through promotional channels).”

The authors go one step further and want to get the new metric included in the GAAP, the Generally Accepted Accounting Principles. If they are successful, then at least the reported figures should in theory be more comparable across companies.

“Our strong recommendation to regulators is to make this a formal GAAP metric with precise reporting rules.”

“By developing auditable statistics, brands will be able to validate significant investments in providing superior customer service.”

Overall, learning a bit more about NPS and the next iteration of that widely used metric was definitely useful, as I had never heard of the Earned Growth Rate before. But based on the experience with NPS, I’m not fully convinced that the Earned Growth Rate will really make much of a difference.

If you’re interested in NPS and the Earned Growth Rate, I would also recommend a comment titled “Will NPS 3.0 solve Net Promoter Score’s shortcomings?” on MyCustomer, which provides some additional opinions on this new metric.

(Prompt for Craiyon to generate the header image: “A group of happy customers recommending your business with data statistics line chart in background.” / Style: Drawing.)