Podcast EP 111 | What is NPS 3.0 and How Can You Bring it to Life in Your Company?

The Net Pro­mot­er Sys­tem mea­sures how con­sis­tent­ly brands turn cus­tomers into advo­cates — and it is con­sid­ered the pre­dom­i­nant cus­tomer suc­cess frame­work. As its pop­u­lar­i­ty grew, NPS start­ed to be mis­used in ways that under­mined its cred­i­bil­i­ty, as unau­dit­ed, self-report­ed Net Pro­mot­er Scores reduced the use­ful­ness of the tool.

NPS founder Fred Reich­held has now intro­duced a hard met­ric based on account­ing results known as ​“earned growth rate”. It cap­tures the rev­enue growth gen­er­at­ed by return­ing cus­tomers and their referrals.

In this pod­cast episode Brad Giles and Kevin Lawrence discuss:

• The prob­lem with the Net Pro­mot­er System
• How NPS 3.0 works
• How to cal­cu­late your Earned Growth Rate

EPISODE TRAN­SCRIPT

Please note that this episode was tran­scribed using an AI appli­ca­tion and may not be 100% gram­mat­i­cal­ly cor­rect – but it will still allow you to scan the episode for key content.

Kevin Lawrence 00:12

Hey, wel­come to the Growth Whis­per­ers pod­cast where every­thing we talk about is about build­ing endur­ing great com­pa­nies. I’m Kevin Lawrence joined as always with my co pilot down in Aus­tralia, Brad Giles. How’s it going?

Brad Giles 00:25

Excel­lent. Thank you. You’re doing very well today. How are you, Kevin?

Kevin Lawrence 00:29

Things are good. So what do we got for our top­ic today? What are we dig­ging into?

Brad Giles 00:39

Today, we are talk­ing about a fas­ci­nat­ing arti­cle that we read that we came across, in from the Har­vard Busi­ness Review. And it’s about a sys­tem that we both have used and advo­cat­ed for many years called Net Pro­mot­er sys­tem, or NPS. And the founder of that con­cept is a guy called Fred Reich­held who wrote a book called The ulti­mate ques­tion, I think, was 2.0. Cor­rect. And that book? Well, we’ve used it with a lot of clients. So today, we’re talk­ing about an arti­cle that he’s writ­ten, which is the next iter­a­tion of net pro­mot­er score, and look­ing at cus­tomer advo­ca­cy in a dif­fer­ent way.

Kevin Lawrence 01:27

Yeah, and shock­ing­ly, it’s NPS 3.0. It’s an awe­some sys­tem. Absolute­ly love it. Excit­ed to dig into it today. Because this arti­cle pro­vid­ed a big epiphany for me as my clients, many of them use it reli­gious­ly and relent­less­ly. So, word of the day, Brad, what do you got?

Brad Giles 01:48

Shared I, I guess I’ve got a word or two words called Memen­to Mori, which is one day, my friend we will pass away. And so we need to live while we live. Just my own per­son­al rea­sons for that, that I prob­a­bly won’t dig into. But you know what, like, we’re not here for a long time, we’re to enjoy and make the most of the time that we hear and what about you, Kev?

Kevin Lawrence 02:13

Our school of hard knocks. I con­tin­ue to learn through that. I think it’s actu­al­ly the best teacher had a great expe­ri­ence. Just recent­ly at the race­track, we’re try­ing too hard, too fast. And a lit­tle Oop­sie. And thank­ful­ly, it’s met­al and fiber­glass that can be fixed and not, you know, human beings, but it’s the school of hard knocks. It’s good for you. It’s hum­bling. It’s an equal­iz­er. It teach­es us quick­ly. And you know, I’ve got this rule of thumb that if I don’t make a cou­ple of big mis­takes every month, I’m not push­ing hard enough. And, you know, nor­mal­ly I hit my quo­ta. So I’m on track this month. So school of hard knocks and ..

Brad Giles 02:57

Momen­tum Mori, it’s sto­ic state­ment, it says you will die. So you must live while you’re alive.

Kevin Lawrence 03:05

Yep. And I got­ta say, I’ve got some amaz­ing friends, includ­ing your­self and oth­ers that I get to see in per­son reg­u­lar­ly, that all believe that life is short. Let’s do great work, cre­ate a great impact on those around us and have a great time, which I’m real­ly look­ing for­ward to doing this com­ing week­end with a bunch of friends. All right, well, let’s jump into the show. Net Pro­mot­er sys­tem, nps 3.0 What a great freakin arti­cle. And you know, I’ll review the sys­tem. And maybe you can review an overview, the first part, maybe the sec­ond word, your bad. But basi­cal­ly, it’s called the Net Pro­mot­er sys­tem. It’s a sys­tem for mea­sur­ing cus­tomer engage­ment, same for employ­ees. And it’s through the win­dow of how like­ly they are to refer you to a friend or col­league. And it’s just a proxy for whether they’re out there with pos­i­tive word of mouth, neg­a­tive word of mouth, or they don’t even men­tion you, you’re free, cred­i­ble, or, you know, they’re just they this they real­ly could­n’t care less, again, for cus­tomers, our employ­ees. So it’s a proxy for word of mouth, which we know it can be an incred­i­ble force in any business.

Brad Giles 04:16

Yeah. And some peo­ple have mis­tak­en­ly called NPS Net Pro­mot­er Score. so delight­ed that you called it the sys­tem, isn’t it? Is it is a sys­tem not just a score? We’ve all prob­a­bly answered the ques­tion in a form in a feed­back form that says, how like­ly would you be to rec­om­mend our com­pa­ny to a friend or rel­a­tive or a col­league, and it’s just ide­al­ly, it’s just one sim­ple ques­tion with per­haps a free text box to write any com­ments. And then what we do is we take the num­bers or the rat­ings from one to six, and they’re what’s called detrac­tors. We take the peo­ple who write a nine or a 10 In, they’re called pro­mot­ers. And then the peo­ple who are a sev­en or eight, they’re peo­ple who are there. What’s the word? Kevin?

Kevin Lawrence 05:09

They’re pas­sives. And they don’t real­ly they don’t count in the math­e­mat­ics of it all, because they don’t do noth­ing. Yeah. They’re not unhappy.

Brad Giles 05:15

Yeah, so they’re pas­sive. And so we don’t count those. So then we sub­tract the detrac­tors from the pro­mot­ers. And that gives us a score from pos­i­tive 100, through to minus 100, poten­tial­ly. So that’s why you could have a NPS of minus 40, or plus 16.

Kevin Lawrence 05:38

Yes, it shows gen­er­al­ly, is the pop­u­la­tion of your cus­tomers, you know, the peo­ple that respond or a proxy for all are they gen­er­al­ly out there super engaged or not. So for exam­ple, you know, in com­pa­nies, you know, you ide­al­ly want all of your employ­ees being pro­mot­ers and the net, the hap­py ones from the real­ly unhap­py ones, you know, ide­al­ly, in a great com­pa­ny, we’ve got a 30% is kind of a min­i­mum score, that we’d see an orga­ni­za­tion that we’d be okay with, when you get north of 50, you know, things are going well. And you know, and often when we look at the senior lead­er­ship team, you know, that score should be, you know, 7080 90 100, the senior peo­ple, they should­n’t be the most engaged if the com­pa­ny is pay­ing more. So it’s a proxy. And, and so the sys­tem is amaz­ing, we use it so many dif­fer­ent com­pa­nies. And I share with Brad and appre­ci­ate that, you know, I got a great chance to work with Bain, who that’s where for Rachel was from, with one of our clients did deep work with them for a num­ber of years to bring it to life in a large orga­ni­za­tion. And it’s just, it’s an amaz­ing method­ol­o­gy. And the best part is, the num­bers are inter­est­ing. But the com­ments are the guide to where the good stuff is hap­pen­ing, or the fric­tion is hap­pen­ing, even Brad, in all of the clients we work with. We do a ver­sion of the NPS rat­ings for the employ­ees that are par­tic­i­pat­ing, and a hand­ful of oth­er ques­tions every quar­ter­ly meet­ing, to get a pulse on what’s actu­al­ly going on in a com­pa­ny just so we get anoth­er deep­er source of data on the employ­ee engage­ment. Of course, we want to know what’s an annu­ity. So it’s an awe­some sys­tem. And it’s very pow­er­ful, because it’s meant to be ongo­ing cus­tomer feed­back. And there was a big freakin prob­lem with it.

Brad Giles 07:20

Big Yeah there is a prob­lem. And that is that it can get I use the word hacked. And you use the word bas­tardized. Yes. So what might hap­pen and in the arti­cle in HBR, this is the exam­ple that they gave, some­one might go in to a mechan­ic to get their car worked on. And then I might the mechan­ic, who is who has a KPI to have a high NPS. So in oth­er words, the man­age­ment of the mechan­ic would say, We want you to pro­vide good cus­tomer ser­vice, which is pret­ty legit­i­mate. Your mechan­ic might try to hack it by say­ing, here’s, here’s what we’ll do. If you give us a 10. On the Net Pro­mot­er Score, we’ll give you a free oil change or some­thing like that. And so peo­ple on the front line, or will peo­ple through­out the orga­ni­za­tion, try to find ways to get high scores, so that they can hack the sys­tem. And it under­mines the cred­i­bil­i­ty of the sys­tem potentially.

Kevin Lawrence 08:23

And even worse, the idea is to have hap­py engaged cus­tomers, and then you’re gonna piss them off because the employ­ees are has­sling them to get high scores. Yeah, like it’s, and this is what the peo­ple have been said to us again, and again, nev­er incen­tivize NPS scores, because if some­thing’s incen­tivized cre­ative, humans are going to find a way to make the score that make the num­ber bet­ter. So man­age­ment leaves them alone. And so I remem­ber like I was in a car deal­er­ship, and was not why I’ve worked with them num­ber, this is not one I worked with. And then a big poster behind the desk, show­ing the dif­fer­ent scores, and what a 10 meant. And they said, We real­ly hope you’ll give us a 10. Because in our world, with the brands that we work with, it was Nis­san, what­ev­er it was, does­n’t mat­ter. The brands that we work with, you know, a 10 is a min­i­mum accept­able, and if it’s not 10, there’s a prob­lem, we need to fix it. So please let us know. Because oth­er­wise, you know, the man­ag­er is gonna get upset with us and blah, blah, blah, blah, blah. And that’s how I get paid. My Com­mis­sion’s and I real­ly want to feed my fam­i­ly. And please, please give me a 10. But it’s laugh­able how bad­ly so the root of it is, you’re incen­tiviz­ing some­thing that is sup­posed to be a nat­ur­al organ­ic source of feed­back, and you end up with cor­rupt­ed data and cor­rupt­ed behav­ior. So that’s a, that’s a prob­lem. And so and they have a solu­tion. So we’ll get to that in a minute. And, you know, when it is man­aged well, though, there is a sec­ondary prob­lem. I mean, I’m pret­ty hard­core with the com­pa­nies that we work with, mak­ing sure they do it right to the best of our abil­i­ties, because we want the feed­back to improve and engage our cus­tomers but they’re word of it is, if you’ve got all these peo­ple who are engaged say­ing that they would refer you, do they. So if you’re put all this ener­gy into super hap­py, engaged cus­tomers, they should stay and bring their friends. And if you put all this ener­gy into hap­py, engaged employ­ees, they should stay and bring their friends. So what they talk about in the arti­cle is, well, do you know if they bring their friends, and if they stay, and they’ve added some addi­tion­al math to show if that is hap­pen­ing, which we’ll get into in a sec­ond? So it’s like, it’s great to have high engage­ment. But are you get­ting paid for it, basi­cal­ly. And that’s what MPs 3.0 is, which I think is ABS a freak­ing lubricant.

Brad Giles 10:45

Yeah. So what they’re doing is in the arti­cle, they talk about the founder of the con­cept, Fred Reich­held, say­ing that he had this epiphany moment where he real­ized that how can we make NPS bet­ter? How can we over­come all of these crit­i­cisms, we can draw on hard facts, which is account­ing results. So every­body, let’s say trusts the account­ing. So if we can con­nect it in some way to the account­ing, we can actu­al­ly make it bet­ter, more trust­ed, more reli­able, and it can dri­ve the orga­ni­za­tion­al improve­ments that make the real dif­fer­ence that peo­ple actu­al­ly should be doing to get bet­ter cus­tomer engage­ment. Meet­ing the cus­tomers need ultimately.

Kevin Lawrence 11:29

Yeah, so it’s sim­ple and bril­liant. And all the best solu­tions are sim­ple. So NPS 3.0 is mea­sur­ing the engage­ment side and Net Pro­mot­er Score. And the accoun­tants will be hap­py on this. Did you get the growth and they call the earned growth rate? Did you get that great return you want­ed on the NPS? Basi­cal­ly, are those hap­py peo­ple fuel­ing your growth? Or do you still have to dump lots of mon­ey in sales and mar­ket­ing? And so you know, the way that I real­ly look at it is of the new busi­ness you gen­er­at­ed, how much was earned, which is repeat cus­tomers and refer­rals, referred busi­ness ver­sus how much was bought sales and mar­ket­ing, where the sales and mar­ket­ing peo­ple went out and chased it and brought them to you. And although it sounds very sim­ple, most peo­ple don’t have a data, peo­ple attract new cus­tomers. And they track churn of accounts or reten­tion of cus­tomers. But they often don’t break down this and it gives you a great num­ber. We actu­al­ly were inter­est­ing, we ran this on our firm, I was shar­ing with Brad, we ran this on a firm and went up as we should, in a con­sult­ing firm or coach­ing firm that pays so much atten­tion to have an engaged cus­tomers, we should have a greater and greater growth rate, which we did. But our brain was like, okay, but well, maybe we can be bet­ter as it always does. So the whole again, in sim­ple terms, it’s all of the growth, you expe­ri­enced, how much came from those engaged cus­tomers stay­ing and bring­ing their friends ver­sus you going out and buy­ing it in the mar­ket? And just because you have peo­ple that would refer does­n’t mean you’re get­ting the referrals.

Brad Giles 13:08

Yeah, so there’s three parts to cal­cu­late. See, it may seem a lit­tle bit com­pli­cat­ed on the sur­face, but it’s actu­al­ly quite sim­ple. So we begin by cal­cu­lat­ing what’s called the net rev­enue reten­tion. If you’re a soft­ware as a ser­vice busi­ness, this will be quite famil­iar to you. But what we do is we take this year’s rev­enues from cus­tomers who were also cus­tomers last year. Okay. And then we divide that by last year’s total rev­enues. Okay, so we’re cal­cu­lat­ing what is the rev­enues that we had from cus­tomers this year, and last year, and if we’ve brought on new cus­tomers, it should be dif­fer­ent. So that’s the first bit we cal­cu­late this thing called Net Rev­enue reten­tion. Sec­ond, we’re ensur­ing that we’re ask­ing cus­tomers, why did you give us your busi­ness? Why have you come to us? And then with­in the answers, we’re divid­ing all of the answers into two sep­a­rate buck­ets, let’s say the first is earned. And that is, we were referred by an exist­ing cus­tomer would be an exam­ple of we earned that rev­enue, that new cus­tomer and the oth­er side is bought. So we, they came to us through our sales and mar­ket­ing efforts, pret­ty easy to split all of the new cus­tomers through those two areas. So that’s the sec­ond one earned or bought. And then the third one is under­stand­ing the per­cent­age from new cus­tomers that you’ve earned through refer­rals. Okay, so out of all of the new cus­tomers, what is the per­cent­age that were earned ver­sus bought? And then that gives us what you kind of said at the begin­ning, which is the earned growth rate.

Kevin Lawrence 14:52

Yeah, that’s, again, it’s just a lit­tle bit of math. But are we get­ting an ROI on all the efforts we be put into mak­ing peo­ple real­ly hap­py and engaged. And you in many orga­ni­za­tions, once they start dig­ging into it, I am sure they’re gonna say, Oh, well, we should prob­a­bly get more refer­rals from our cus­tomers or employ­ees, and they’re going to look into the sys­tems and fig­ure out how they can make it even eas­i­er for peo­ple to open the door for them into new oppor­tu­ni­ties. So how do you bring this to life in your com­pa­ny, and this is, again, it’s not rock­et sci­ence. But what is aware­ness? This isn’t one. So we had, you know, Cur­tis, one of the con­sul­tants on our team, took the arti­cle, and ran the mod­el on our firm, he went through all of our cus­tomers looked at our reten­tion, looked at the new ones and where they came from, and cal­cu­lat­ed all the cal­cu­la­tions. So you know, you can get a real­ly good finance per­son or, you know, call Cur­tis, and he can run it, but it’s not rock­et sci­ence, but it’s get­ting some­one to do the math to know where you stand today. And then decid­ing whether you’re hap­py with that or not, and what you do about it. So basi­cal­ly start­ing to track it as part of your KPIs, your earned growth rate, whether it’s month­ly or quar­ter­ly, you can decide. And then look­ing into it and get­ting some teams dig­ging into it, like, how could we increase our earned growth rate with our employ­ees, and also with our cus­tomers to dif­fer­ent things, because in this mar­ket, peo­ple are real­ly try­ing to get more refer­rals of employ­ees, because it’s hard to get in hire amaz­ing peo­ple now more than ever, but it’s always hard. But that’s not Robert, start track­ing it, dig into the data and fig­ure out what you can do to enhance it like you would with any KPI you want to improve.

Brad Giles 16:29

What I love about it is that it dri­ves the com­pa­ny to build a bet­ter com­pa­ny, you know, where you and I always the fram­ing of this growth whis­pers pod­cast is build­ing endur­ing great com­pa­nies. And this is all about build­ing that. So what could peo­ple do to improve that earned growth rate?

Kevin Lawrence 16:57

Yes you got­ta go dig into the data and see where you’re not get­ting it. Some­times it’s because of reten­tion. If you don’t have enough reten­tion of your clients, that caus­es you to shrink, and a lot of com­pa­nies aren’t great at that some arms or. But real­ly, it’s brain­storm­ing with the peo­ple who man­age those client rela­tion­ships. Some­times let­ting them know that you have capac­i­ty, let­ting them know how to like, it’s just some­times there’s some­thing in the sys­tem that needs to be added, removed or lubri­cat­ed to have it free, but depends on it. There’s I’ve seen exam­ples of data as we start­ed to run this, you know, some com­pa­nies get a lot of refer­rals from their clients, but they don’t have great reten­tion. So their earned growth rate is real­ly low, because of the churn of the exist­ing clients for what­ev­er rea­son, it could be busi­ness mod­el, it could be ser­vice, it could be com­pe­ti­tion, could be lots of things. And then there’s some peo­ple that are so obsessed with sales and mar­ket­ing and gen­er­at­ing new leads, that they actu­al­ly don’t put any ener­gy into earn­ing refer­rals from exist­ing clients. Again, it’s just it’s, you know, dig in and fig­ure it out.

Brad Giles 18:03

There’s a com­pa­ny, this com­pa­ny very briefly from Perth. They’re an Inter­net ser­vice provider, they built the num­ber one, the num­ber one inter­net ser­vice provider in Aus­tralia, and they had the high­est NPS for their mar­ket seg­ment ISPs in the world. So they built that all on the back of NPS, every time some­one would tele­phone their call cen­ter there, the pre­vi­ous NPS would pop up and the job of the call cen­ter oper­a­tor was to increase that com­pa­ny was called III net crew. And so you know, it can if you focus on the NPS, it dri­ves a bet­ter busi­ness out­come. It dri­ves bet­ter engage­ment. And it that’s through oper­a­tional mech­a­nisms, I guess. So yeah, it can make a huge difference.

Kevin Lawrence 18:54

And anoth­er good exam­ple, we’re going to wrap up here, but anoth­er good exam­ple is soft­ware that we use called Docusign. It’s com­mon in the world is lots of peo­ple use it. But after you sign a doc­u­ment, it asks you to cre­ate an account. It’s basi­cal­ly are that’s going to help your own growth rate, because your exist­ing cus­tomers and that’s in these net­work type soft­ware’s one cus­tomer uses it and then it pings anoth­er cus­tomer sign up for it. Drop­box was like that, when they start­ed up to a lot of these com­pa­nies in soft­ware, it makes it eas­i­er to do that and lever­age the net­work effect. And once the net­work starts to use it more that’s, that’s in soft­ware. It’s a whole dif­fer­ent game and can be, and that’s why these com­pa­nies can accel­er­ate a lot faster. All right, well, let’s wrap up. So the main thing is nps 3.0. Hey, it’s great to mea­sure engage­ment, bud­dy and get­ting paid for that. IE, what’s your earned growth rate on cus­tomers, our employ­ees, right, you want to run through the three key points to think there’s a problem

Brad Giles 19:49

with NPS it can get hacked or bas­tardized by employ­ees who are incen­tivized to get a high­er score and then we don’t get a true result and it under mind to the whole thing. So instead, NPs con­nects that out­come to actu­al account­ing results that every­one under­stands and trusts and ulti­mate­ly dri­ves the right behav­ior. You cal­cu­late it very briefly by under­stand­ing your net rev­enue reten­tion. And that is what was the change in rev­enue this year? Why the sec­ond part is why peo­ple came to you, why did we get there busi­ness was earned or was it bought. And then final­ly, cal­cu­lat­ing the per­cent­age of earned new cus­tomers, the new cus­tomers that we did­n’t buy through sales or mar­ket­ing efforts. And then final­ly, how to bring this to life in our com­pa­ny, track it, start mea­sur­ing it under­stand the behav­iors that will dri­ve that change. Kevin gonna move to close this out.

Kevin Lawrence 20:53

It’s awe­some. Wow, it was great. Just love this. We’re going to use it with lots of our clients going for­ward. Thanks for lis­ten­ing. This has been the growth whis­per­ers pod­cast if you haven’t sub­scribed already, please hit that but­ton. And hey, if you like it, share it with a few friends. Can you take this episode share it with your exec team share it with your lead­er­ship team that would just make a lot of sense. I’m Kevin Lawrence. You can reach us and our newslet­ters, also our web­sites and sign up to get our per­spec­tives on a reg­u­lar basis week­ly. Brad Giles is at evo­lu­tion part​ners​.com​.au, And Kev­in’s at Lawrence and co​.com. Have a great week.