Put Your Customers First and Let them Do the Talking. Get Your Guide on How to Build an Advocacy Growth Engine.

Brands to Model

The book shares how great businesses—like Apple, Southwest Airlines, Chewy, and Marriott among others—are successfully harnessing the power of Customer Capitalism. Reichheld has been monitoring Customer Capitalists and NPS leaders for many years. Their companies live by the F.R.E.D. credo—Foster, Recommendation, Eliminate, and Detraction. To showcase the results of this investment strategy, he even created the F.R.E.D. Stock Index (FREDSI) which reiterates the fact and provides persuasive evidence that putting customers first doesn’t come at the expense of the investors but actually works in their favor.

brand-of-model

He also lays the groundwork principles and provides a checklist for companies seeking to shift from financial capitalism to Customer Capitalism. Reichheld proposes that the new strategy of any organization should be grounded in Customer Capitalism. He suggests when financial metrics like profits and TSR fail to correctly identify the success of a company, we must rely on the new metric of Customer Capitalism, since companies that put customers’ interests first have the best chance of achieving sustainable greatness.

Customer Earned Growth Rate

In his quest to create reliable audit-worthy data for companies of all sizes, verticals, and geography, Reichheld devised the Customer Earned Growth Rate metric. Customer Earned Growth Rate is a complementary sister metric to NPS that relieves the pressure to make a survey-based score into a target, which corrupts its accuracy and effectiveness. It’s a simple, yet effective metric that gauges the health of the company’s growth engine. Earned Growth Rate measures the underlying revenue growth generated by existing customers coming back for more and bringing friends. It’s the ratio of earned growth to total growth.

In order to calculate their Earned Growth Rate, most companies will need to upgrade their basic accounting capabilities, something that’s already in practice at firms like Amazon, Costco, and Chewy. The two components of Earned Growth are:

Net Revenue Retention (NRR)— The key driver of SaaS valuations

Earned New Customer Revenue (ENCR)— Quantifies revenues from the subset of new customers earned through recommendations and referrals from existing customers

Reichheld proposes every company should get started by tracking these basic statistics:

  • arrowCustomer onboarding date
  • arrowPrimary reason for joining
  • arrowPurchase frequency
  • arrowPurchase volumes
  • arrowPricing
  • arrowCost of products/services
  • arrowChanges in the above items over time
  • arrow Date customer becomes inactive or leaves
earn-growth-rate

This data will enable you to compute Earned Growth. With customer-based accounting facts to inform ongoing investment and budgeting decisions, and support reporting to investors, this new focus on accountability will enable executives to upgrade from outdated accounting metrics and work proactively towards fostering customer love. He also suggests investors and board members insist on reviewing customer-based accounting results.

The simplest way to calculate Earned Growth Rate is to quantify revenue for the current period from customers who have purchased from you previously and divide by total revenues (all customers) from the previous period. This will estimate your Net Revenue Retention (NRR). Then add your best estimate of earned new revenue (as a percentage of total current period revenues) to derive your Earned Growth factor, and Earned Growth Rate, which is simply the factor minus 100%.

For a detailed explanation of the calculation refer to page 295 of Winning on Purpose.

Hierarchy of Customer Love

Loving your Customer is a natural consequence when you have a customer-centric approach and Customer Capitalist mindset. In the book, Reichheld emphasizes Costco’s Founder and Former CEO Jim Sinegal’s Hierarchy of Constituencies:

Make sure you’re always on the right side of the law, which means you’re not knowingly hurting your community or environment

  • arrowTake care of your customers
  • arrowTake care of your employees
  • arrowTake care of your shareholders
customer-love

Reichheld explains that for customers to feel the love, companies need to inspire their teams. Customer Capitalists and NPS leaders show love to their companies’ frontline workers and executive teams. The leader’s first responsibility is to help team members embrace and achieve this inherently inspiring mission—safely and sustainably. The very best team leaders make sure their team members receive standing ovations from their customers. Experiencing that signal of love and affirmation is the secret ingredient that great leaders use to inspire their teams and provides the essential fuel for winning on purpose. Consequently, the interests of your investors and stakeholders must also be taken care of.

Customer Capitalism Is Far from Mainstream

Although Reichheld has given a detailed account of how NPS leaders and Customer Capitalists have emerged winners in various verticals, the unanimous acceptance of the fact that ‘loving your customers is beneficial’ in the long run remains mediocre at best. A 2020 article by Fortune Magazine cited only 10% of business leaders believe the primary purpose of their firm is to maximize value for customers, while many companies still operate on the old-school financial capitalist mindset of maximizing shareholder value. Although many businesses today want to be more customer-centric, they aren’t willing to elevate customer happiness to become their primary purpose, impeding meaningful progress.

Another concern raised by FirstService CEO Charlie Chase is that promoters can accelerate growth faster than companies can handle. In response to Reichheld’s theory, Chase states, “Your book hits on the themes we live every day. Be humble, empower people to live the Golden Rule, and lead them in ways that inspire. But you should be aware that this creates a real problem. We earn more customers than we can handle. Living the golden rule creates promoters who grow your business faster than anyone thought possible. Staffing up to meet the demand presents a difficult situation.”

mainstream

Loyalty Enables Customer Capitalism

Winning on Purpose focuses on loving your customers and providing the best possible experience but, in order to love your customers, you need to know them, understand their shopping patterns, and identify factors that drive their purchases. The first and primary step to loving your customers is to know them and first-party data enables you to do so effectively and accurately.

While Reichheld doesn’t once talk about loyalty programs as a means to create customer loyalty, and ultimately Customer Capitalism, a loyalty strategy provides the ideal foundation for brands to evolve to a Customer Capitalism mindset and can help them achieve a higher Earned Growth Rate faster. Loyalty programs enable you to gather first-party data directly from your customers, significantly increase customer engagement across the entire customer journey, and improve your retention rate. Loyalty programs provide a mutual value exchange that involves a conscious commitment from both the brand and the customer.

capitalism

For their continued association, brands reward customers, which lays the foundation for a long-lasting customer-brand relationship, and also cultivates your most valuable assets—brand advocates and promoters. Loyalty marketing can help you create individualized experiences that show your customers you’re listening and you care. With the help of Annex Cloud, a global provider of loyalty SaaS technology, you can collect first-party data at scale and push it across your tech stack, enabling you to create truly omnichannel experiences for your customers, and even overcome supply chain issues. To take a concrete first step towards Customer Capitalism and improve customer loyalty, contact us.

©2021 All Rights Reserved. AnnexCloud