Fred Reichheld: How to Build a Business Customers Can't Stop Recommending | Entrepreneurship | YAPClassic

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As always, you can find all of our incredible deals in the show notes

or at youngimprofeting.com/deals. Hey, AppBam, we're about to launch something that might be my favorite thing we've ever done on the podcast. A brand new series called How We Profit. Now, I've been doing youngimprofeting podcast for eight years

and my listeners are successful. We are real entrepreneurs with real businesses and a lot of you guys are crushing it behind the scenes. You may not be super famous, you may not be a billionaire yet but you've got a business that you've learned how to scale.

And we want to hear from you. One of the best ways to learn as an entrepreneur is from your peers. And I found it super helpful to be in these peer entrepreneurship groups and learn from other entrepreneurs who are at my level, but just in a different industry.

So that's what I want to bring to this podcast. I want this to be our own peer group, but on the podcast and so I'm going to be interviewing people

or making anywhere from 500,000 to $10 million a year.

They're not super famous. They're not the typical billionaires that are on my show. These are real entrepreneurs who are crushing it behind the scenes and we're going to uncover what they do to sell, how they get their customers,

what their profit margin looks like, how they market and so much more. It just sounds like you and you want to be featured on youngimprofeting podcast for our How We Profit series. Just head to youngimprofeting.com/apply

and share your story.

“Let me know why you think you should be featured on the show.”

Again, that's youngimprofeting.com/apply and who knows, maybe you'll be our next guest on youngimprofeting.com. What's up, yeah, fam. Your customers can be your best sales team,

but only if you give them something worth talking about. And I've seen this in my own business. So much of our growth has come from relationships, referrals, and people having a great experience with yet media and wanting to spread the word.

That's what Will Gadara taught us on Monday. Hospitality makes people feel seen, valued, and remembered. And today's the app classic is the perfect follow-up because Great Hospitality creates great customer loyalty. So today we're bringing back my conversation

with Fred Raichel, the creator of net promoter score and one of the top voices on customer loyalty. Fred reminds us why the best businesses do not just chase new customers. They create loyal fans who come back

bring their friends and help the business grow. So with that, let's get into my conversation with Fred Raichel. Hey Fred, welcome to Youngimprofeting podcast. Thank you, Great to be here. I am excited for this conversation.

Thanks for joining me. So before we get into customer loyalty and what it means to love your customer, I would love to back up. And I feel like a good place to start is right after college.

From my understanding, you've been working at your job being in company since you graduated in 1977. It's not often that somebody stays at the same company throughout their whole career these days. So granted, you are half time now,

but you still wrap that organization. And to me, it seems like you really took a different approach. You were an entrepreneur within the organization. You launched iconic products like NPS, even speaking, writing books.

And I'm sure that kept things interesting for you. So my first question is, why did you stay so long at being in company? How have you kept it spicy all this time?

“And why did you decide to stay there your entire career?”

Great question. And when I asked myself regularly, I think the primary reason I've stayed at bay in all these years is it's assembled a group of really special people with values that I admire.

The whole firm was committed to this idea

to make our customers lives better, solve their problems.

And that turns out to be a profitable strategy. It's commercially successful, but it's more important. I think it's a life-enriching mission that when you serve others and get recognized rewarded when you help other people succeed, that actually inspires energy.

So it's been financially great for me, but at this point in my life, we have more money than we'll ever be able to spend. It's an energy and focus, and one inspires you to keep working hard. And it's that same idea that bay is a platform

that helps its partners do things that make them their families and their communities proud. Yeah, and like I was telling you offline,

“a lot of people think the only way to be massively successful”

is to be an entrepreneur, but that's simply not the case,

so I'd love for you to shed light on that of it. Well, I think people who are most innovative are the ones who are going to be the most successful. And there are certainly lots of examples of building your own firm, but there's plenty of examples of working within firms

or within communities, whether it's universities or think tanks. You have a broad range. However, you need the leverage of an organization to really have an impact in the world. And the key is to make sure that you choose wisely

that organization that fits your values and it's full of people who aspire to similar life goals. There's a worthy of your loyalty. And then make sure you help them succeed. It's not so much about you succeeding.

“You've got to play a big role in helping that organization succeed”

and fulfill its mission. I couldn't agree more. So let's talk about the origin story behind that promoter score. You actually said a keyword in your previous response lives enriched. And from my research, I learned that that was the original name.

That lives enriched is what you originally wanted to call net promoter score. So talk to us about the genesis of this idea and where you got it from. Well, I was an economics major. And the thing that caught my eye early in my career were organizations, both small and large, that were outperforming any understanding of business strategy

or financial accounting that I learned in business school. And we saw this common thread was that they were treating their, they treated people right. They earned the loyalty of their customers and employees. And the right kind of loyalty, this loyalty that is itself sacrifice it.

It's committing yourself to the success of an organization because of the mission and the principles that lives by. And but it wasn't measured.

And so initially I looked at an incredible leverage of retention rates.

People that kept their customers a little bit longer. Double triple quadruple their profits. And no one knew that. But over the years, it's transition. I think the economics is the reward.

It's one of the benefits. But the real root cause are our organizations that are committed to making their customers lives better. Because it's more than a commercial mission. It's a, you know, everyone talks about making the world a better place. I'd say let's get serious about making the world a better place and start with the customers,

“the people who's responsibility, you have to serve and solve problems for.”

Yeah, and I'd love to stick on that a bit. Why do you think the greatest companies are the ones that enrich their customers lives? Well, in my youth, I just saw their financial results were extraordinary. But that I think what makes them truly extraordinary. And the reason their financials are extraordinary is they're committed to a purpose.

That's worthy of loyalty that this purpose of enriching lives. You know, this net promoter score that you mentioned I invented 20 years ago, as I was toying with names for it was thinking, well, it's really net lives enriched. Because every time you touch a person's life, you know, whether you're individual a team or a company, you're either going to enrich that life or diminish it.

And we need to keep track of that instead of just talk about it as a very, very idea. And so this idea of how likely it would recommend us to a friend as the best way to know if you enrich the life. I mean, the logic is pretty clear. When you have your life enriched as a customer and you want to share that with a friend or a loved one, that's that referral as an act of love.

It means you want to enrich the life that the person you know you care about. And so it's a signal. Down in organization has indeed enriched the life. So, you know, net lives enriched just seemed a little too soft and theoretical, I suppose, philosophical and net promoter had a business ring, you know, promoters, our customers who go out and they refer their friends, they buy more from you, they, they're your assets.

And so net promoter score became the name. I suppose in some settings I wish I'd left it at net lives enriched. No, I think you made a good choice, honestly, because it's, it's like you said, it has a little business ring to it.

So it turns out you actually hated surveys before you started MPS and you ended up launching a survey.

But from my understanding, it just has two questions are at least started with two questions. You alluded to one of them.

“What were the two questions and why did you choose those?”

Well, I wanted, I'm so sick of surveys and these long market research things that all will just take a minute of your time and 80 questions later. If I had to have a survey at all, because I do think surveys would take people's time. It's a, it's a, it's a, it's a friction. So I wanted one question.

And the, the question that was the best predictor of loyalty behaviors turned out to be likely to direct a man. How likely would you recommend us to a friend? So zero through ten, we asked that question, that score. Let's, you know, if you created a promoter enriched a life or a detractor diminished a life, then we have an open text verbatim follow-up to tell us why.

And, and it, in the customers own words, they can explain why you enriched the life or how you diminished their life. And, and people have to take the time to read that. Don't get artificial intelligence and delegate it to the statistics department or some computer read it. And, and the people who read it should feel the emotion of an enriched life or a diminished life. And they, and good people care about that.

Then my daughter convinced me. My daughter Jenny said, Deb, we, we're using three questions, not, not two. And I've seen great, it's question inflation has been a real issue. They, 12, becomes 20, becomes 100. It's not all in Jenny, you can't do this to me.

But she convinced me, she had a question that deserves to be part of the canon. So it, she said, our, our promoters, they tell us why they love us in that verbatim text.

“But if we asked them, is there anything else we could have done to make your experience better?”

They tell you good ideas that can make you can innovate and, and make you even stronger. And remember, your promoters, they're your biggest fans, they want you to succeed. You're a part of their personal brand, because when you refer someone, you're sharing your personal identity. You're, your, your reputation with the brand, it's a big deal. And those people care about you and they want you to succeed.

So give them an option to give you their best ideas, but the don't go past three. They're just no way that customers should be answering five or ten questions. Yeah, I totally agree. I feel like you lose people at that point. So I know you were inspired by Andy Taylor, who was the founder of Enterprise Rentacar.

So I'd love to hear that story. What did you find so innovative and interesting when you were, I guess you spoke with Andy Taylor when you had a conversation with him? Yeah, Andy has been a, he's been a supporter over the years and taught me a lot when I first met him. It was in, for my first book, I was trying to explain how his organization had grown from a tiny little leasing business in St. Louis, Missouri into the largest car rental company on earth. As a private company, you know, talk about entrepreneurial success.

He never had to go to Wall Street and get funny money and play that game.

And he said, well, friend, there's no magic. And he and I are both from the Midwest. He's still speaking in that plain language. You got to treat your customers so they come back for more and bring their friends. And that simple idea. First of all, he inspired the net promoter score because he had a two-question survey he was using with his branches in the rental car business.

And I saw how powerful it could be. But the even more powerful thing was these words. Back for more and bring their friends. Accounting does not measure that. Generally, except the accounting principles just gloss over it. They look at total revenue.

“And what Andy is saying, you have to look customer, are they expanding?”

Are they repurchasing, expanding their purchases? And are they referring their friends? And because we don't measure those with accounting, which is the yardstick we all use. And, you know, without intending it, entrepreneurs sort of take the mindset of accountants because they're using that measurement. They're using that measurement system for their major decisions and paying people.

Suddenly, you have a worldview of accountants, which is how much money I can extract from a customer's wallet. As opposed to how can I treat them so well they come back for more and bring their friends?

I love that. Let's hold that thought for a second.

I really want to dig into that a bit later. But first, I want to set some more context. So I want to talk about the three main parts of NPS in terms of how you evaluate customers. So there's promoters, there's passives and detractors. Could you define that for us?

Yeah, we found that just in our early research, when you ask customers on a scale from zero to ten, how likely to recommend us to a friend. Those who score you a nine or a ten, they tend to be the promoters who actually do refer you. They buy more stuff, they're your assets, sevens and eights. They got what they paid for, they're passively satisfied.

You didn't enrich their life, they got what they paid for.

And then zero through six, you've diminished their life. Something was wrong. They won't recommend you to actually tend to say bad things about you. And feel like the instant there's an alternative, they'll jump on it. Go to a competitor.

So promoters passive detractors became this simple categorization of success, you know, foul tip and failure. And when you keep track of that and get to the root cause of why it lets organization start to measure the right thing.

“Are we treating people in a way that enriches their life and what do we need to do differently to improve our results?”

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“And what would you say the telltale signs of a promoter are?”

They put a smile on your face. A very successful entrepreneur is true at Kathy. Now to see it, but Bill Chick-fil-A into a powerhouse of a business. And to it, I didn't have completely congruent points of view on some social issues and religious issues.

But we were respectful, I think, of each other. And what I respected was he lived this notion of the golden rule. Love thy name, whereas thyself he, it's southern Baptist, I'm told, have a, their life's mission often is captured in a biblical verse.

And his was Proverbs 22, 11. A good name is worth more than silver or gold, essentially. And so your reputation is everything.

making them happy is how you build a reputation,

how you live up to the golden rule.

“And that was the formula that has created this monster success”

that continues to, and it beat you to run against these great companies like McDonald's and Burger King. But Chick-fil-A just blasts through them. Just the same way enterprise-printed car blasted through hurts and aimless and the others.

There is a flywheel of once you get customers coming back from on bringing their friends. That's the economic engine that drives prosperity. Even though it's pretty much invisible to accountants except in the rearview mirror.

I totally agree. I have a social media agency out media. And we haven't gotten any funding. It's been bootstrapped. And it's all because of this flywheel effect of referrals.

It's like, my clients have a good experience. They tell their other very successful friends. And it just helps us become the pre-aminent social media and podcast agency. Have you ever heard of Jay Abraham?

No, I don't think so. He is a very famous marketer. He's a former yap guest. And he talks about the strategy of pre-aminent. And basically what it means is if you treat your customers well,

if you've got the best reputation in the industry, you are like the pre-aminent business. You're the number one hands-down best choice.

And you'll never have a problem getting customers.

And he learned from one of his mentees, Tony Robbins, that you have to fall and love with your customers, not your products and your services. So I'd love for you to talk to us about loving your customers. You talk about loving your customers.

It's a pretty rare word to use in business. So what are the ways that companies can love their customers and drive more promoters, more customer loyalty? You want to treat people the way you'd want to love one treat. That's what makes the world a better place.

That love is at the core. Love breeds loyalty. When customers feel loved, they come back for more and bring their friends. And that's what starts this economic flywheel.

Love is hard to measure, but loyalty is pretty easy to measure if you're serious about it. Because in this digital age, you can watch

how many of customers are repeating,

how many are referring their friends. I mean, one of my recent investments in a company that has a technology platform to help give and receive referrals.

“And I think that's what the world needs to do.”

Referrals are everything. Instead of doing it on a survey, I like what you recommend. Let's keep track of real referrals. Because that's where the economic value is.

And that's where the reputation is. So at your point, great businesses. And I agree with Robbins and Abraham. That's where the most, that's the fusion right there that energizes success.

And I think, rather than kidding around with surveys, let's keep track of referrals. And to your point, love is so important. When you love someone, you're going to recommend the company that gave you that great service,

that gave you that great experience. So it's not necessarily that they love your company. They love their friends and family so much that they're going to recommend your company. Absolutely.

You know, because people say they love their apple computer. I think this is, but they also say they love their docks. So they love their, they were ice cream. The love that actually energizes and spires is this notion of enriching the lives you touch.

And you're happiness deriving from that success. And people who live that life live a pretty good life, even if they don't make a ton of money that they have made a difference in the world. And we'll die proud.

This, the notion that love is also behind business success.

“I think it's the radical proposition that I make”

in winning on purpose. And the evidence is, it's really overwhelming. People don't read books anymore much. But this one has the evidence that the company who has earned the love, the loyalty of their customers,

using NPS as a good proxy for that, measuring it. The highest NPS company in every industry will look down has the highest total shareholder return over the decade. And that's been a huge money maker for me as an investor.

But I think it's even more of companies and boards and directors and investors. They've got to see the facts here. This flywheel we talked about. It's the only flywheel that keeps spinning through time.

100%. And to that point, you know, COVID hit, right? Black Swan event, we had no idea what, you know, what the economic impact would be. Nobody thought coming and these things can happen.

They happen every several years. So talk to us about how customer loyalty and having a high NPS gore can kind of mitigate these Black Swan events. Well, Black Swan's have been going on for a long time. It feels like we have a flock of them landing in the last few years.

But that's how the world works. And the companies who have the financial minds that that's very common today, running themselves in a financing, the accounting. And remember, accounting solves for profits.

to run your business, which big big companies

almost have to, then you are teaching your people the purpose of your business is profits. And that's not a, that's not a good purpose that goes back to how much can we extract from our customers while it's as long as it's legal.

That destroys energy. Good people don't commit themselves to that. Then if you can make loving your customers, this idea of making their lives better, and keep track of progress there,

and recognize and reward people for earning tens, real tens, not begging for tens,

“then I think you can manage your way to success.”

But I suppose the biggest challenge, almost every entrepreneur gets this intuitively. They can't succeed. They can't afford expensive advertising and crazy marketing promotions and big sales forces.

They have to turn their customers into their sales force. But as they get bigger, most companies flip over to the dark side where accounting rules the day and the purpose becomes profits.

Yeah. You know, I think we should do a rebranding of NPS and call it net love score. What do you think about that? I even toyed with that in its early days.

And that was, that was a step too far for me. In fact, even using the word love in business, I thought was a stretch. Until you think about it as a customer. If you had an organization or a team

who was always watching out for your best interests

and innovating and striving to put a smile on your face and make your life better, of course you would go there all that you give them all of the business you had and you were free or friends.

So it's feeling the love as a customer that inspires loyalty and starts the flywheel spinning. Okay. So my next question is how we can turn passives and detractors into promoters.

“What are the ways that you've seen work in the past?”

Probably the earliest successes in the net promoter movement were built around fixing detractors. And the early adopters, NPS is an open source system. I felt like a bigger chance of changing the world

to better chance if we made it free. Everyone can use it experiment with it. And because of that, companies like Apple grabbed it, Lego, IBM's, just thousands of companies experimented and helped it make it better.

And the mindset that clicked first

was gosh, when I see a detractor, I've got a quality problem. I have a defect. So zero defection's quality management. Let's close the loop.

Would that customer get to the root cause? Fix it. Do it at the right level, the organization. You know, don't do it at the headquarters. Do it at the branch or the product where this issue occurred.

So the learning is in the right place in the organization. That was phase one. Where we are now is what innovations? Not only keep customers delighted, but raise the game so they are.

Nine's or ten's and they're referring ten friends, not just two. So it's innovation. And it, yes, passives. When you talk to a passive and you say, "What could we do better?"

They go, "I don't know." You know, I'm happy I got what I paid for.

“You have to be the innovator and get your promoters”

to give you interesting ideas. And think about the companies that you buy from for whom you're a promoter and what they did that was so remarkable that turned you into a referring engine and experiment.

And the cool thing about NPS as a survey is you can run these experiments without putting it out for the whole population. You can see what works. Amazon's very good at this. They run experiments if it doesn't work.

Kill it. If it creates a lot of tens and repeat purchases, roll it out around the world. They had that innovation. I think needs to be energized.

Step one, go find out when people are referring you. What is that they're saying about you? Get a real clear sense of what is remarkable. And then teach your organization that you can't rest on your laurels.

Do more of that. But you have to come up with additional stuff. Amazon, great example. They did so many things right with the easy purchase and shopping card and one click.

But a few years ago, they said, "Oh, and when you want to return something, you don't have to put it back in its box and get the label. Just take the thing and bring it to the UPS store. And we'll take care of all that stuff and credit your money right away."

It's like, that kind of innovation is why they still have a crazy net promoter score high and why they continue growing prosper. People have legitimate issues. How they treat their people.

All this waste and packaging. But at the core, Amazon's purpose is to make customers live better.

"Stop packing stuff, the cardboard wastage,

they respond very quickly to it."

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Streaming, but not so, wow. I want to take a side track really quick, because you brought something up that I meant to bring up in the beginning of the conversation, but we didn't talk about it.

And that's the fact that you launched MPS as an open source software, which to me was just so interesting,

“and I think pretty innovative back then when you did it.”

So talk to us about why you decided to launch it as open source. For those who may not know, some of my listeners are on the younger side, what is an open source software, what are the pros and cons of launching something like that?

Well, the classic open source software would be Google's Android, and I think media is a lovely example. These companies build themselves, and let others innovate and build on top of them.

And while there is a commercial model, there are people who package that software and make it easy to use, and they understand Red Hat is a classic example of a firm that has found out how to have a profitable commercial.

Overlay, the core software itself, the core ideas, the IP, are there for everyone to share. In the case of net promoter, you have to have a license,

if you're using net promoter in your business. So if you're a survey firm and you're calculating net promoter scores and using that,

“you have to pay pay in a small license fee.”

But the license fee is so modest, it's not a money maker. It just makes it clear that when you say net promoter when you ask it zero through 10,

these things are constant, and the brand gets protected. But for users who are just businesses that want to get feedback from their customer, it's free.

You might want to hire somebody who has software to do that really in an elegant way. You might want to call people or send them a survey yourself. And I did it

because at that point in my life, if you want to be a Jillian error or a quadruple Jillian error, that's sort of stupid. Do you want to have major impact on the world?

That's what seemed energizing to me. And I thought we would have a bigger impact

And for my understanding,

you've done a lot of investments based on NPS score.

“And the companies that are doing it right,”

and we'll get into that later on in terms of the right in the wrong way, right? But the customers that are doing right, you tend to invest in those companies, is there a way for other people

to find out what companies have a true high accurate NPS score? If you're the target customer, you're the right age group and the right socioeconomic segment.

If you and your friends are just going crazy and referring it, chances are it's a very high net promoter score. So that's just a common sense way. I've had a little bit of an advantage

because it's been as more and more of the organization. It's been has seen the power of net promoter and how difficult it is for individual companies

to get net promoter scores that are comparable

and apples to apples. Because the instant you or the one asking for feedback it biases which of your customers bother responding and what they say. So we've created been prism.

And NPS prism is a classic monstrously large panel bird, I guess probably it doesn't different industries now. That gets really accurate,

really comparable NPS scores for every brand in the industry. And with that advantage, I invest in the leader. And if you take the companies

that had the highest NPS in my previous book, the ultimate question 2.0, I wrote with Rob Marky. I invested in those companies. My share total shareholder returns

over the decade after the book was published. We're higher than any mutual fund or ETF track by morning star track. The higher than the lion's share of private equity firms. And I had the liquidity and the low risk

of just investing in public companies. The insight being I could shine a light on the flywheel of each competitor in an industry and see which one had the best flywheel spinning customers coming back from Warren

and their friends. And that has been, you know, it's tens of millions of dollars for me personally. And it's available to everyone. But shockingly,

there is not yet a big movement to get on accurate NPS scores. The world is still in such an accounting mindset that there's still just a tiny minority of investors who see the power.

“That's why I was shocked because I was like,”

why isn't there some sort of like tracker that everybody knows about like top NPS scores? And since there isn't, we've got like the Godfather here. What are the top ones?

What should we be investing in? What are you investing in? Who's a recent one? You know, NPS prism, the most recent industry that they added

was the grocery business. And the top score was a regional grosser called HEB down in Texas. But it's private. On the other hand,

even though if you can't invest, you know where you want to have your kids go work. Chick-fil-A has the highest NPS. They're a private company. But I'd say then relatives who

feel like entrepreneurs and want to be a storm manager, and that's a wonderful career path. The trader Joe's is so one of the top handful, but that too is owned by the next one in NPS is all the private still.

Then you get Costco. All of these are at superstar levels.

“It's so interesting that so many are private.”

It just goes to show that if you've got the flywheel, if fact, you don't need to take on investors, but keep going, sorry for interrupting you. Yeah, so Costco's a public firm. I invested in Costco the instant I saw

that they were topping NPS because my personal experience has been so positive. And I use them heavily as an example in winning on purpose this last book.

Their philosophy is customers come first.

And they act in a way that makes it clear that they live their philosophy. The lot of stories about Costco that I really advise entrepreneurs to read. They've gone and you know,

they're one of the larger companies in the world today. And their formula works in China. It works everywhere. Every kind of town. They're just crushing it.

And they make people's lives better. I'll give a comparison. I bought a expensive Mercedes Benz. Great. Just lovely car, except on my first trip to the airport as a little late as rushing.

It threw its windshield wiper. And so I'm driving, trying to look through the passenger window to get the airport without having an accident. I was very frustrated. And then when I went to get it fixed,

that they said it's my fault. I must have gone to one of those car washes that just lodges the rubber blade. And I'm thinking, what? And I had to, not just one.

I had to buy two because these windshield wiper is coming back to the 200 bucks. And Mercedes uses NPS. They think they do. But they're begging for scores and bleeding.

Then I go Costco and I had a shaver electric shaver

but forget the brand.

“But it stopped working after nine months.”

I said, that's not right. This was expensive shaver. So I took it back to the Costco store. Not even the one I bought at that. And I said, listen, it's not working.

Can you do anything for me? And they scanned it. They scanned my membership card. And they said, your account's been credited. Wow.

No questions about what went wrong. They said, no, customer like you. If you're not happy with it, it's not right. And I thought, oh my gosh. One of the guys I know.

There are quite a few billionaires that I know. Personally. One of the early ones was Scott Cook, the founder of Intuit. It was Turbo Tax and QuickBooks and so forth. And his philosophy.

He started at Bane about when I did. And then he left to found Intuit. He was the first adopter outside of Bane of net promoter. And he said, my philosophy is, we don't deserve a dollar of profit until our customers happy.

We think about what a high-minded philosophy that is. But it worked in software.

“That's why he still got a successful software firm.”

Most 98% of the others success stories back in his day. They're gone. Costco has the same philosophy. You're a good customer. And they have my track record as a customer.

They know we buy a lot. You are unhappy with that product that we don't deserve it. And make it manufactured doesn't deserve any profit.

What an amazing common sense way to run a business.

Yeah. For sure. I mean, it's so important to have customer loyalty. So I have a story to share. I have the biggest blip that I ever made with yacht media, my social agency.

So I have a business partner. He owns 10% and he's totally the numbers guy. He's all financial. Super smart guy. Very successful.

I'm very much like the relationship person. Most of my clients are actually former guests that become my clients. And then they become my mentors and my friends and everything like that. And so my business partner is very much about the numbers. And we've been growing really fast.

And, you know, our rates keep getting higher and higher. And we have legacy clients that pay a lot less than our clients now. And so the biggest blip that I ever made of my company was when my executive team convinced me to reach out to all my legacy customers and try to raise the rates. And it messed up some of my relationships for fine now.

But like it took a while to get it back on track. And it just goes to show that when you have legacy customers. These were these were clients that were with me for a couple years. They referred all their friends. They were like my number one advocates. And for a period of time, they were mad at me for trying to raise the rates on them, right?

Because they felt like they were loyal. And so there is a problem with the way that people think in terms of like the counting practices. And just only looking at the numbers and the profits and not actually evaluating customer relationships. Because I sent these finance meetings and I get so frustrated. They're like, oh, like, you know, like if it's like some sort of like a negative forecast.

And I'm like, but you guys don't know about all the conversations I'm having. And like there's so much bubbling up that's just not calculated. You know, so I'd love for you to talk about, you know, what needs to change in terms of accounting practices. And how entrepreneurs can avoid making them some state of not measuring their customer loyalty. It's an excellent question.

And I've wrestled with that for a long time as he people misusing net promoter. The way card dealers do begging for scores. But with surveys, unless you have a big panel with double blind research, you can't get honest accurate comparable scores. What do we measure that really gets to the heart of customer love? In winning on purpose, I introduce a new metric that I think it deserves to be the equal net promoter.

Maybe someday it's it's slight superior, it's called her in growth.

“And it just it takes the the point of view that you have with every customer, you have to keep track of, are they buying more or less or defecting?”

And are they referring friends? And so your earned growth is your total growth, the business generates revenue that comes from existing customers being happy and buying more and the friends they refer. Great companies will have earned growth rates.

130, 140, 150 percent. So you think about their resting growth rate with no sales and marketing, they're just growing like crazy.

I think for entrepreneurs and for and for the serious numbers people force them to start measuring your earned growth rate and your earned growth component for every customer. And you'll start focusing on the right things instead of aggregates like total revenue, which can lead you down the wrong path. If your customer is not buying more, you know, coming back for more and bringing their friends, there's something wrong that needs attention. But if they are growing, you know, 150 percent a year, don't screw up the decision making by by coutowing to the accounting mindset.

We give it way too much power in our thought 100 percent and I would argue like that little blip that story that I was telling you about when I went to go raise the rates with my customer.

“Now, we were trying to raise rates so minimally 20 percent and I always tell my partners now like look, we did that and we lost so many referrals.”

We could have grown, you know, what we're doing amazing so don't get the wrong picture, but like we could have grown even faster had we not lost all those referrals for that point in time while my customers were upset with me. So it's just such a cool tool, what's what's the actual formula behind earned growth rate. There's two components to earn growth, the first one is that the back for more, which encapsulates both retention, you know, because if somebody diminishes their business or defects that nets out against it and customers that expand their purchases and netting those things, there is an existing accounting metric called net revenue retention.

The biggest component for most companies and then you add the revenue from customers who came primarily as a result of referrals from existing customers. That sent a revenue that's earned growth and if you are, you know, if you're well above 100 percent.

“That means you're, you've got the flywheel spinning in the right direction.”

So if I've never done any paid ads, no marketing and everything is refurled and that means I have a high earned growth rate.

The very best customer companies I've found have 70, 80, even 90 percent of their new customers are coming on referral primarily. That doesn't mean they don't advertise at all, you know, there's a lot of reinforcing publicity and advertising, but the, yes, your customer was the primary reason you came aboard. If they say referral from a friend or if you have a tech platform that actually it's clear our friend referred them and keeps track of it. Those are those are the best kind of business you can possibly have.

Those are the assets the accountant don't measure today and they send you down the wrong path because of that. I feel like this is so educational and interesting and helpful for all the entrepreneurs that are out there. So a question for you something like a podcast right now it is podcast can be a lead generation tool for people similarly like having like a webinar where you invite potential clients. Would you consider that being referral based business or would you consider that being more of like paid promotion.

It's on the edge you know if you're educating people about what you stand for and what your philosophy is. It's a way of communicating the truth to them. It's not quite as good as an existing customer who really knows you and isn't. It's not what you say about you it's what their experience has been and what they say about you that's the highest form of.

“Positive marketing but I think just what you're describing with podcasts and building community it's the next best thing.”

Yeah I agree I feel like it's like slightly right under is like having like a social media platform where you're known as a thought leader and you're giving away free advice or a podcast where you're building trust with someone. It's not quite paid promotion it's sort of like the gray area right. Well and you know I think reviews are even a step further down if you could get really honest reviews on these sites and curated a little bit so it's the customers that you care about. But it's even Amazon who is so strong they're it's sloppy when you go in there you start ratings they don't make much difference because you know that what half of those are paid and somewhere cheating.

So yeah you you can read the verbatms and sort of figure out who thinks like me and and you can get benefit but if people really cared about review sites they could be so much better than they are today. They made a really smart somebody who runs one of the biggest retailers in the world said Fred when we we don't get the best insights from our at our NPS surveys they're good but it's it's they're they know they're talking to us so there's. Social barriers about telling the truth the not hurting our feelings or maybe they're negotiating with us you know it's a lot of biases there the way we get to the truth is to listen to our customers talking to other customers or people they're referring.

on Facebook groups or in some third party platform so the real truth.

Is he listening in on what people are saying about you in a way that's not creepy and inappropriate but if you can have an honest way of listening to that. You can learn how are you leading to like social listening and kind of doing research about what people are saying on social media sites or something different.

I mean tech platforms and the one that I'm most excited about is called mentioned me there they are asking people if you're going to refer if you'll do it this way.

“We'll make it worth your while with a small donation to charity or something that you'll you'll care about it's not a bribe and and we're going to give a warm welcome to the person you're referring once again it's not a bribe but it's an appropriate.”

Recognition they're finding who is really making referrals there and what they're saying. So if you take that verbatim comment if you know why I'm referring to a friend why and you read that comment that's that's the goal that's that is what in the customers eyes and their words.

Make sure you're remarkable and make sure something they think would enrich the life of their life.

Well you're definitely making me feel encouraged to send out some sort of an NPS survey to my clients so I'm excited about that.

“Let's move on to your latest book winning on purpose.”

You ended up writing it after you got diagnosed with cancer so I'd love to understand why you weren't inspired to write this book and we've covered a few topics that are in it but tell us about what people can find in this book. When you don't know how many months you've got to live and when that when I got to diagnosis it was one of those you know you'll probably make it friend but you know there's a 20 or 30% chance you won't be around in another year or two. And so you think what do I need to get accomplished while and for me there were so many people miss using that promoter two thirds more to at least two thirds of the world's large companies using that promoter or say they do.

But they're using it the wrong way they don't understand this philosophy it's just it's a KPI like the handful of others and I had to get across this idea that no no it's it's much it's a whole philosophy it's you know go back to the the days of. The world thought of the it was an earth-centered solar system and he had all these crazy theories about the sun rotating around the earth and then Copernicus and the handful of others said no it's it's the sun is the center and improved it.

“I believe the customer is the center of the of the solar system and we don't most people don't agree with that yet and so winning on purpose.”

Said no the winning purpose the only winning purpose is to commit your organization to making your customers lives better and loving customers and so. Only 10% of businesses big businesses believe that today so it's a radical proposition but Copernicus was a radical proposition he was right I think I'm right but you know with time will tell. Will the we're most business people come over to this point of view that customers you know it's not just all all stakeholders it's not. Maximized shareholder value the the purpose of the business is to make my customers lives better and if I do that then I can make my employees happy because they have a life of meaning and purpose and.

And and they're part of the flywheel to generate superior economics and of course our investors are better off because of that. But man customers have to come first and whether it's Apple or Costco or Lego or Bayon company every great business I know has customer front and center and systems to reinforce that because you know you're fighting against the current of financial accounting which which points you want to different. I want to go deep on one aspect of this because I feel like a lot of people are under the mindset that employees is where it starts right employees are the priority happy employees equals happy customers.

We hear this all the time why do you feel like it starts like the purpose of business is to enrich the lives of the customer and not necessarily that it starts first with employees.

There's a lot of things that make employees happy that make customers very unhappy you know I don't want to work long hours I don't want to take on the tough camp with I see a grumpy customer coming in the store I'll go to the bathroom and let somebody else take care of and if you don't have your employees inspired. To find ways to delight customers and make their life better not only will it be financially unsuccessful, but you're putting them in a position of being selfish and great leaders help.

To show the power of love so the leaders primary responsibility isn't to make the customers happy it's to inspire their teams to take on that mission embrace that mission of loving customers and help them succeed and when they do make sure they get their appropriate recognition and rewards. We're going to do a conversation list of the system that makes salesmen rich for over promising and selling a lot of new business and it never turns into customer promoters who come back from armbring their friends and therefore never become a true asset to the business.

You got to really rethink compensation hiring promotion at bay and you can't it's very hard to get promoted at bay and unless your team thinks you live the values of the company and make our client succeed.

We're forcing systems of who we hire, how we train, how we run huddles on a weekly basis, how you get promoted. It has customer value first and I think no leader is doing their cut their employees of favor if they don't help them understand that they're happiness their employees happiness is based on making a meaningful contribution that the team values in and making customers.

“I've read this to such an awesome conversation to kind of around this out and I have a couple last questions that I ask at the end that I ask all my guests but to round out this portion of the conversation.”

You know you've been doing NPS for 20 years, you've had the privilege of studying so many really well known businesses. What are the top business lessons that you've learned in your career.

At the end of the book, I sort of pull back the curtain and make it clear that this is actually a life advice that I'm trying to give to my grandchildren who are too young to read the book at this point. But you know, if you believe this mindset and you want to make the world a better place, it's really hard to do that on your own. You have to team up with others who have similar values principles and team up and find a way to help them succeed in living that mission and making it the truth and making it the common practice.

“So choose the people you hang with really carefully. Don't just hire them because they'll make you money.”

Make sure these are people who are going to be meaning contributing to teams who are committed to enriching customer lives.

And who feel like this golden rule idea of love that I neighbor is the center of a well-live life and purpose. Because you know, in the end, your your loyalty is the people and the principles that they live. I think, you know, yes, loyalty is the individual people, but loyalty has to be based on how they embody the principles that you believe are central to a well-live life and your purpose. Those loyalty is they just define your legacy and they certainly shape your your life be thoughtful and and then and be loyal when when people are when you when you found that, you know, why I'm at the end 50 well enough quite 50 years, but

And it's a group that I feel is is helping make the world better and there's nothing better you can do with your life and being connected to those kinds of teams and those organizations.

And don't take crappy profit based purpose as the customer as an investor, you know, there's so much talk about environmental investing and you know, I pollution as the stop. Seriously, the worst kind of pollution are people mistreating each other and abusing each other in the name of profit. I completely agree. So I asked some questions at the end of each episode that and we do some fun stuff at the end of the year with them. So the first question is what is one actionable thing that our young and proffters can do today to be more profiting tomorrow.

Get a sample of your new customers and ask them why they came on board and for those that said it's referral find out who referred them. What it was about what they said that make that referral so impactful. And then go talk to the person who referred and understand what made them so confident in you that they would co-brand their reputation get a get a root cause set of conversations there. I think that's the most important thing to do and then make sure your teams. Feel the responsibility to be remarkable that they their job isn't just to get somebody off the phone on time or to make them sort of happy enough to not be a problem.

The job is to do something remarkable that they're going to talk about with their friends and that's a high standard. And then your people have to help with pressure back on you don't you know what what they need in terms of systems and resources and support training tools. That once you get your employees feeling like our job is when we realize we touch and we measure our success that way.

“I am going to make this mandatory listening for all of my 60 employees and my executive team so that they know what our priorities here are. Yeah, so our final question here is what is your secret to profiting in life.”

Have grandchildren and have them visit a lot and work in our listeners go to learn more about you and everything that you do. Net promoter system is a website that has a lot of tools and resources and just search on winning on purpose and you'll start seeing the things that we're developing.

And and today it's still a radical philosophy so go to those two sites or and LinkedIn there's a newsletter I do on LinkedIn called customer obsession that I think is a pretty good dose.

I'd like to see teams talking about that one each month to see what what lessons there are for them awesome one big fan of LinkedIn I'll make sure I follow you on there we're going to stick all your links in the show notes your book all your social sites your website.

“Thank you so much Fred this was an awesome conversation with my pleasure thank you.”

Hey at fam we're about to launch something that might be my favorite thing we've ever done on the podcast a brand new series called how we profit now I've been doing young and profiting podcast for eight years and my listeners are successful we are real entrepreneurs with real businesses and a lot of you guys are crushing it behind the scenes. You may not be super famous you may not be a billionaire yet but you've got a business that you've learned how to scale and we want to hear from you one of the best ways to learn as an entrepreneur is from your peers and I found it super helpful to be in these peer entrepreneurship groups.

I learned from other entrepreneurs who are at my level but just in a different industry so that's what I want to bring to this podcast. I want this to be our own peer group. But on the podcast and so I'm going to be interviewing people are making anywhere from 500,000 to 10 million dollars a year they're not super famous they're not the typical billionaires that are on my show.

“These are real entrepreneurs who are crushing it behind the scenes and we're going to uncover what they do to sell how they get their customers with a profit margin looks like how they market and so much more.”

It just sounds like you and you want to be featured on young and profiting podcasts for our how we profit series just headed to young and profiting dot com slash apply and share your story let me know why you think you should be featured on the show again that's young and profiting dot com slash apply and who knows maybe you'll be our next guest on young and profiting podcast.