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3 metrics to drop the Net Promoter Score (NPS) once and for all.

08:42 reading time - The NPS no longer works (maybe it never did). The alternative to Net Promoter Score for measuring sustainable growth. Practical examples for measuring the effectiveness of the Growth Machine
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In summary

  • The NPS measures the probability of recommendation but has many limitations.
  • It can be influenced by the time of evaluation and does not always reflect the quality of the product.
  • The alternative to the NPS is the Earned Growth Rate, which considers customer loyalty and the ability to attract new customers by word of mouth.
  • Net Revenue Retention (NRR) and Earned New Customer Value (ENCV) are the key metrics for measuring sustainable growth.
  • The example shows that turnover alone does not measure the effectiveness of business strategy.
  • The article explains how to measure the effectiveness of the Growth Machine by calculating EGR, NRR and ENCV.

One of the most frequent metrics in the KPIs and OKRs of the companies I work with is the Net Promoter Score.

Although NPS seems useful for calculating customer happiness and loyalty, I have rarely seen a correlation between NPS and the company’s ability to generate new business from happy customers.

What is NPS and how is it calculated?

Net Promoter Score is a metric that measures the likelihood that a happy customer will recommend products or services to others, creating a word-of-mouth mechanism.

The idea for this metric came from Fred Reichheld and his team at Bain & Company at work on a Satmetrix survey in the early 2000s. Like many of the consulting artifacts this measurement does not reflect reality. We have all received surveys such as “How likely would you be to recommend our product or service to a colleague or relative?” and we know how unfluent the answer can be.

To calculate the NPS, one must subtract the percentage of detractors from the percentage of promoters. Detractors are those who give a grade from 0 to 6, neutrals give 7 or 8 and are not considered in the final calculation, and promoters give 9 or 10.

The theory behind this measurement states that a negative experience has a much deeper influence than a positive one. Therefore, companies must offer an exceptional customer experience to get recommended.

Why is the NPS not a reliable number?

The NPS is affected by the time at which the assessment is requested. If requested after a positive experience, the NPS will be high; if after a negative experience, it will be low.

If required too early in the client relationship, it is not representative. If requested too late since the last meaningful interaction, the experience can be positively reevaluated because-as they say-time makes things better.

NPS represents a fluctuating trend and should be related to the individual customer, not averaged over the entire customer base.

The NPS does not directly represent corporate growth. A positive NPS does not guarantee an increase in company revenues.

The likelihood of recommending does not imply that the client actually does so. I recommend implementing follow-up processes and incentives to segment promoters and achieve concrete results. Here the costs often outweigh the benefits.

NPS is not a direct indicator of customer loyalty. A satisfied customer may not become a promoter of the product or service for so many reasons including the nature of the product itself…

The NPS is not a direct indicator of product quality or product innovation. A high-quality product could get a negative NPS if it was not properly presented to the customer.

These reasons seem to me to be enough to stop considering it, and especially to stop bothering customers with such irrelevant questions.

Is there a better alternative to Net Promoter Score?

The answer is yes. The alternative is to measure the effect of the phenomenon itself, that is, of customer loyalty and enthusiasm in using the product, such that they recommend or suggest its adoption.

Where do we see the effect of good strategy and product improvement? In tee areas:

– Ability to increase market penetration

– To increase the value generated by each customer

– Increasing turnover through recommendations

These three phenomena can be measured by two specific metrics: Net Revenue Retention and Earned New Customer Value.

Combined together, these metrics give us the value of theEarned Growth Rate, which indicates how effective the company is in its growth mechanisms.

This metric is used to measure whether the new strategy is bringing results, without being fooled by simple revenue growth.

In the next paragraphs I explain how to calculate it with a practical example.

Earned Growth Rate (EGR), what is it and how is it calculated?

It measures the strategy’s real impact on growth, that is, the ability to collect more money from its customers while simultaneously reducing marketing costs. It represents the sustainable growth to which every strategy aspires.

It is calculated by adding Net Revenue Retention and Earned New Customer Value and subtracting 100 because both metrics are percentages as well.

How do you measure customer loyalty? Net Revenue Retention (NRR)

NRR indicates the ability to retain customers over time, and is crucial because it should not be confused with turnover. For many companies, the sales process ends with the first sale, when in reality this is only the beginning of a relationship. Two important variables must be considered: churn and expansion. The NRR allows us to control how strong this relationship is and how effective the product is in retaining customers over the long term.

It is measured over a given period of time by subtracting the value of contracts from the beginning of the period with churn, which indicates the loss of revenue due to customers canceling service, and adding up the value of expansion i.e., all Up-sells and Cross-sells.

An NRR above 100% indicates that the company is growing and existing customers are spending more over time. A value below 100% signals retention and upselling problems.

PS: I had already mentioned NRR (or NDR where D stands for Dollar) at the time of Adobe’s attempted acquisition of Figma. This metric was a key part of the stellar assessment. Read the note here.

Here in the formula is the calculation using the concept of Annual Recurring Revenue very dear to businesses in SaaS, but which you can replace with the annualized value of contracts if your business model does not involve subscriptions.

How do you measure word of mouth? Earned New Customer Value

This metric assesses a company’s success in acquiring new customers through customer recommendations. It represents the economic value of word of mouth. It is calculated by relating the revenue from new customers from referrals to the total revenue from new customers, then multiplying by one hundred.

A business case: why does increased turnover not measure strategy execution?

Consider the Alpha and Beta companies. The Alpha company experienced a 20 percent increase in sales, while the Beta company experienced a 10 percent decrease in sales.

The table below shows the data of the two companies, taking into consideration not only revenue, but also the annualized component of Annual Recurring Revenue, that is, the annualized component of outstanding contracts, churn, and the value of revenue from expansion.

AlphaBeta
Turnover 2022€ 1.000.000€ 1.000.000
Turnover 2023€ 1.200.000€ 900.000
Beginning ARR (2022)€ 800.000€ 700.000
Churn (2023)€ 100.000€ 150.000
Expansion (2023)€ 200.000€ 50.000

At first glance, it might seem that Alpha’s strategy is more effective than Beta’s. However, using these very new metrics, we will discover the opposite.

NRR of Alpha

NRR of Beta

AlphaBeta
NRR112,5%85,7%

Here are the two results compared. The NRR demonstrates Alpha is able to retain more turnover than Beta, having an NRR greater than 100. Beta, on the other hand, lost customers, and consequently lost revenues. Its NRR is less than 100.

Understanding the strategy behind the numbers: the importance of context

Numbers without context can be dangerous and even risk being exploited. For this reason, I recommend that each leader accompany his or her numerical updates with a text explaining the context in which those results were obtained.

Let’s return to our case: let’s imagine that Beta has embarked on a product improvement strategy, boldly choosing to focus only on a segment crucial to its growth, rather than on its entire customer base. This choice generated discontent among other customers, leading them to abandon the product and causing a reduction in sales. Seen this way, it might seem like a questionable decision. How can the effect of this strategic decision be calculated? We calculate the Earned New Customer Value.

ENCV of Alpha and Beta

To arrive at the calculation, we extract two important data from Business Intelligence: total turnover from new customers in the year and turnover from new customers from referral. Calculating the ENCV, we find that Beta customers, that is, those who have remained loyal to the product, are much more satisfied than Alpha customers. In fact, they generated twice the value!

AlphaBeta
Turnover from new customers€ 300.000€ 300.000
of which from references€ 105.000€ 225.000
ENCV35%75%

This puts Beta’s strategy in a radically different light. Beta has decided to slow down growth to focus on the product and trigger a significant change: to become sustainable from a customer acquisition standpoint through the success of its users.

This measurement is, in my opinion, a thousand times more effective than the simple promise of recommendation derived from the Net Promoter Score. Don’t you think so?

Earned Growth Rate (EGR) to measure the effectiveness of growth mechanics: is the Growth Machine working?

It is time to calculate EGR, that is, how much growth both companies are gaining considering the ability to sell and keep customers so happy that they become product ambassadors.

AlphaBeta
NRR112,5%85,7%
ENCV35%75%
EGR47,5%60,7%

As you can see, the Beta company has a much higher EGR, and this indicates that its growth strategy, not only is correct but is more sustainable.

If we had only considered turnover, we would have been misled, as it is normal when going through times of strategic restructuring to have fluctuations in turnover as not all customers will be equally happy with the new version of the company.

Business leaders can use this type of measurement to correctly interpret strategy results.

The ability to activate current clients of in EGR mechanisms is the missing link in any Growth Machine.

EGR measures the effectiveness of the Growth Machine even when the time for implementation and manifestation of impact may be longer than one fiscal cycle.

Many strategies are abandoned precisely because they do not produce immediate results, but the most powerful strategies exploit exponential mechanisms and need to be executed with patience, perseverance and discipline, as well as measured and adjusted frequently.

These metrics represent a scientific measurement of the effectiveness of the Growth Machine. Implement it in your company now, in 90 minutes, by attending the next available Workshop. All upcoming dates here.

Can’ t wait to work together.

Non perdere le prossime Note. Ogni lunedì alle 7:00. Gratis.

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