187. The Creator of NPS Says It Was Never Built for Surveys ft. Fred Reichheld (Bain & Company)

His latest is Winning on Purpose.

Fred Reichheld:
I always thought when I heard Andy Taylor and Enterprise front the car, say back for more and bring your friends, I thought, oh, back for more is the guts of this thing. And refer your friends is like the little icing on the cake. On average, 20% of the new customers came because of referral. But those 20% generate close closer to 80% of the profitable growth. The next HBR that people will see from me is going to prove that referral is the cake man, not the icing.

Josh Schachter [Host]:
You’re listening to Unchurned, brought to you by the Gainsight Podcast Network. Subscribe to our substack@ Unchurned.Gainsight.com where we go deep on every episode. Like how one post sales team at Cloudbeds built over 150 AI agents. That story and more@ Unchurned.Gainsight dot com hey everybody and welcome to this episode of Unchurned. I’m your host Josh Schachter, senior vice president of strategy and go to market development at Gainsight. I’m incredibly humbled, flattered, excited, all the things to welcome Fred Reichheld to our show. For anyone listening out there who somehow doesn’t know Fred’s name, he’s the inventor creator of Net Promoters Core NPS. He literally created the framework that many of us in customer success, post sales, sales, all the things use in our careers.

Josh Schachter [Host]:
He’s a Bain fellow. He was with Bain for many decades. Fred can tell us more about that. He’s written five books on customer loyalty. His latest is Winning on Purpose. I’ve got it right up here. I’m actually three quarters of the way through it myself. It’s been amazing to read what he, his, his thought leadership there.

Josh Schachter [Host]:
And I’ll stop there. Fred, welcome so much to the show.

Fred Reichheld:
Thank you, Josh.

Josh Schachter [Host]:
Yeah, so you know, our time is scarce. I want to just jump right into it. People know Net Promoter, you know nps and I’m sure you’ve talked about this ad nauseam. So I apologize for probably asking you a question that you’ve already received. But I want to, I’m really curious from an entrepreneur’s perspective. You know, as an entrepreneur you do things and you really want them to hit their product market fit and all of a sudden Be able to just create that groundswell and grow and scale and stuff like that. And you know, I’m sure you’re, you’re not the first person to create a score of loyalty and satisfaction and value and those sorts of dynamics. Briefly, can you, can you tell us a little bit about how NPS became such a hit? Like the story behind that?

Fred Reichheld:
Sure. Early on in my career at Bain, I noticed certain companies were performing far above what all the business school professors or the investment analysts would think is possible. They’re just growing faster and generating more cash than should have was possible. Some, some were competitors of Ben clients we had, Ben had some of those as clients. Some were small little companies that over my career became huge world class companies. And I saw the common theme was that they were, were, was loyalty of customers and employees. And at the core of how they did that, they, they treated their customers so, so that they came back for more and referred their friends. It’s such a simple common sense idea.

Fred Reichheld:
You never read about that in strategy texts and you don’t have a class on it in business school. I mean maybe Fast Company or one of the entrepreneurial magazines has, has covered it. But, but I, I, I learned it by asking super successful entrepreneurs like Andy Taylor, the guy that turned enterprise rent a car from a teeny little family leasing business his father started into the largest car rental company on earth with I think they have 250,000 cars. No, that can’t be right. Couldn’t be million because it’s the largest fleet of cars on earth. And you think, whoa, there’s a capital intensive business. Where did he get the money? Because he’s a private company. I asked him.

Fred Reichheld:
And remember he’s a little guy starting out. And so Hertz and Avis and Europcar and these huge leviathans, they crush these little guys, right? That’s what happens in business, especially a low growth business like car rental and low tech. And he says, Fred, there’s only, only one way you grow a profitable business. You treat your customers so they come back for more and bring their friends. They refer their friends, duh. And he’s right. And yet accounting doesn’t track this. We don’t hold people accountable for it.

Fred Reichheld:
And so it becomes invisible to all but the most intuitively brilliant leaders who keep understanding I gotta grow from the core. My core are the customers who love me so much they give me all their business and refer their colleagues and friends and neighbors. And so my whole career has been, well, how can we track this phenomenon, make it a Science instead of just intuition and then prove the economics behind it so people can start thinking about, gee, what’s this worth investing in?

Josh Schachter [Host]:
I’m going to cut you off here only because there’s so much good stuff I want to talk to you about. I read in a book, I don’t even remember what book, about a decade ago, and I hope this is correct, but. Right. Rosa Parks, she created a movement, you know, wouldn’t go to the back of the bus. And when, when I read this book, they said, you know, but she wasn’t some like, you know, damsel, frail lady. Like, she was what the story that people don’t realize is that she was really glued into the community and she was able to create that movement because of these other externality or these factors that maybe are not part of the story. I don’t know if that’s relevant or not. Maybe I’m just going on a tangent.

Josh Schachter [Host]:
What I’m trying to get to is, Fred, what’s the. Like, how was NPS able to really pick up what’s the story behind that? Of course it had to be. It had to work for people to continue to pass it on to their friends and their colleagues and whatnot. But, like, how do you create this phenomenon, which is what you did? Like, what’s behind that?

Fred Reichheld:
Well, I think it starts with a failed existing system. People were using customer satisfaction as the framework, an idea that, well, you have to keep your customers happy, your employees happy, your investors happy, your suppliers happy, your community happy, everybody happy, and we’ll just do satisfaction surveys to find out how happy they are. There was no connection to the economics of the business or to cash flow. There was no real connection to how governance in a business works and the true accountability. If you’re a public firm, you really have to be loyal to your investor. So I actually think that framework is a failed framework. If your primary commitment isn’t to helping your employees enrich the lives of customers. The thing doesn’t work over the long haul, it collapses.

Fred Reichheld:
There’s a moral underpinning to a great business that does have economics to support it, but at its core, it makes the world better. And so it attracts the energy and the, you know, all the good things. Certain, you know, like love in religions, say, love thy neighbor. Well, this is sort of the business equivalent. If you loved your teams, you would put them in a position where they can enrich the lives of customers and, and hear their standing ovations and feel the joy and the cash flow. But at the core, it’s Treating people right. And satisfaction sounded good. And it was a science.

Fred Reichheld:
And you’d read upon it in the Wall Street Journal marketing section. Every, every quarter there’s big news. The American Customer Satisfaction Index now tells you who’s the rank order. And then I linked all of the, the winners in this, this satisfaction measurement to their stock market returns over a decade. And, and there was, there’s nothing there. It was empty. And then people. And here’s why NPS actually it worked because it was fundamentally right and tart turned, you know, it based on moral principles.

Fred Reichheld:
It does connect to the financial success of a company. It’s guided my personal investments. Whereas this ACSI turned itself into a ETF which is now publicly available. Go look at their results over the last 10 or 15 years. They’re in the bottom like 5% or 10% of all ETFs with the most brilliant, sophisticated professor PhD. You know, make Fred look stupid. Fred doesn’t understand statistics, but they suck at making money. And I think when companies saw this feels right, it actually helps us grow profitably.

Fred Reichheld:
You know, it took off and I had these enemies who were saying, oh Fred is evil. He doesn’t understand statistics. You know, how dare he say one question could, could supplant all of this brilliant market research and PhD theses that we’ve written. And there was this controversy that I think got sort of put it on

Josh Schachter [Host]:
the map and you did. About 25 years ago, probably, I’m going to guess without a single tweet or LinkedIn post. Kudos to you, Fred. I don’t know, like that’s, I can’t even fathom that in today’s world, the

Fred Reichheld:
world works on a viral basis. You know, whether it’s disease and you know, this idea that exponential forces overwhelm the others. And I think in some ways social media trivializes that and gets people off on the wrong, you know, fashion and stuff that’s real. Like a virus that makes people sick is real. So is a viral spread of an insight that makes the world better. And so it’s that natural spread of the truth. I started in the old days, but boy, is it relevant in a social media world where the facts come to the surface. Not so much with paid influencers and all the search engine optimization and all the gimmickry and the digital advertising chicanery.

Fred Reichheld:
But man, when your friend that you trust says this is the dentist you should go to or this is the car you ought to buy, that’s how the world still works, believe it or not.

Josh Schachter [Host]:
Yeah, why is it always the dentist that I feel like are the best? Right, right. Like the dentists are the ones you

Fred Reichheld:
do not want to. I will not refer someone to a dentist or a doctor until I’m 100% sure they are going to do right by my friend or my neighbor.

Josh Schachter [Host]:
Yeah. You know, it’s funny. I had a doctor’s appointment last week and it wasn’t a great experience. Doctor was fine, but I waited in the waiting room for like almost an hour and a half. The, the staff was just, they were, they had their little New York attitude. They were, they weren’t rude, but they weren’t not rude. And Dr. Was friendly, but he didn’t apologize to the waiter or whatever.

Josh Schachter [Host]:
And he was on his computer doing the notes from the previous patient as he was making me wait in front of his computer with both double monitors blocking any line of sight between me and him. And then an hour after my appointment, I get a text message. First text message is just his photo, like a, like, like just his portrait shot. And then the next text message is, you know, thank you for greeting, you know, meeting with Dr. So and so. Click here to leave feedback. I’m like, and I did. Just out of curiosity, takes me straight to like the Google page to give him stars.

Josh Schachter [Host]:
It’s like, are you kidding me? At least the dentist has an auto reminder of my birthday every year, you know, like. But listen, I digress. What, what, what really hooked me in the book. And you know, there’s truth behind like just numbers talk. Right? So I’m, I’m showing this here kind of sloppily in front of the camera. You’ve got a couple of pages like this that are charts of, I think you call it like the Fred Index or something. Like, I wish, I wish that you had been my financial advisor 25 years ago. Let me say it that way.

Josh Schachter [Host]:
Like, what really, like what gripped me when I started reading your book was when I saw you made it very. I mean, you proved through the numbers the shareholder value of being.

Fred Reichheld:
Yeah, it’s not a black box of a portfolio. I actually, because we have understood at Bain the power of a Net promoter framework, we got really good at measuring it and turning it into a science of measurement. We have a subsidiary called NPS Prism that sells the data and gets it right. So it’s apples to apples comparisons. I’ve invested whenever there’s no Bain client involved and there’s no possibility of inside information. I invested in companies who had the highest net promoter score in their industry. And I Now fly private. Things have worked well in my life.

Fred Reichheld:
Bain pays well and so forth. But my net worth is dominated by beating the market. And I put the facts in the book.

Josh Schachter [Host]:
You did. No, you did.

Fred Reichheld:
It’s probably in the top 1% of all private equity returns in a non leveraged leveraged portfolio.

Josh Schachter [Host]:
Is it too late to copy your, to mimic your approach?

Fred Reichheld:
No. If you, you know, in fact, for entrepreneurs, if you see net promoter scores that are world class and your referral engine is going, you have viral exponential upside. Invest. Invest in your own business. If you can get that data on others. If you see the referral engine going. And that’s the most powerful part of this engine. I didn’t understand that until recently.

Fred Reichheld:
I always thought when I heard Andy Taylor and Andrew Bryce rent the car, say back for more and bring your friends. I thought, oh, back for more is the guts of this thing. And refer your friends as like the little icing on the cake. No, referrals is the viral exponential opportunity that blows people’s minds. Back for more is good, but it’s finite. You know, every customer has a finite need for your product or service. You can push more and cross sell, but basically that just makes you less referable than delighting them so much. They refer two or three friends because then those friends referred two or three.

Fred Reichheld:
And that’s where you get rich.

Josh Schachter [Host]:
I love it. You talk about like Discover and you show them that they’ve actually had like the highest returns out of every financial credit card company. I’m like, what? And I know. And there’s a cool like list you have in the book of all the amazing things Discover does for their customers. These are things I didn’t realize. All I know is the, you know, the, the commercials, right, of like, you know, this is your doppelganger that you’re speaking to. But, but there’s, there’s a method to that madness, right? As you talk about in the book, how do you find out which of these companies are doing best in that regard with that referral engine?

Fred Reichheld:
Well, that discovers a great example. It’s partly through Bain’s NPS prism, this science of which is for sale. It’s a business to business, so it’s not for sale yet to consumers, but you might convince them to sell to consumers. So I saw surprising to me because I said, hey, Amex is the class act. I’ve done consulting in the credit, we all know that. But then Discover had a higher nps and I’m thinking, oh, statistical aberration. Month after month they’re the top. So I looked at their annual report and I said, oh my God, it’s David Nelms, who’s the CEO of this company.

Fred Reichheld:
He used to work on one of my teams at Bain. In fact, he was on one of the teams that discovered the loyalty effect economics way back. And I called him and so we met and I interviewed his organization. I started to see how he had put this framework to work in a credit card business. And it was just, you know, it’s like I’ve seen this before. I’ve seen it in Enterprise Rent a Car. I’ve seen it at Apple, I see it at Vanguard Mutual Funds. And that’s when I invest a lot, not just a little, because I see the philosophy, not just the statistical result.

Josh Schachter [Host]:
How much did you make on Discover, Fred?

Fred Reichheld:
I’m glad you know I’m joking. Not talking billions, but, you know, for my, For a guy who’s just in investing tens or maybe a few hundred thousand dollars in a company, it’s, it’s.

Josh Schachter [Host]:
That compounds.

Fred Reichheld:
That’s right, 25% per year. That goes. There’s the magic of compound interest. When you’re old like me and you’ve been doing this for 20 or 30 years, it’s sort of astonishing.

Josh Schachter [Host]:
Okay. All right. So I’m writing a book. Not for gainsay, but it’s. The two things are very intertwined because it’s about founders who build relationships with different constituents in their circle. Their investors, their, their, their co founders, their customers. Obviously, I’m curious for my own research purposes now, do you see you talk about. Is Dave was his name for, For, For Discovery.

Fred Reichheld:
Yeah, yeah.

Josh Schachter [Host]:
Scott Cook, I believe you talk about in the book. Right. He’s.

Fred Reichheld:
That is another guy who actually, he was the first business,

Josh Schachter [Host]:
by the way, by founder of Intuit. For those that aren’t aware.

Fred Reichheld:
Yeah, there’s a lot of billionaires in this book I wrote. And because this philosophy is at the core. Scott I told him about an HBR article I was writing which was introducing Net Promoter Score. And he said, oh, this is exactly what I’ve wanted for my business. And so he grabbed me and marched me down the parking lot to meet the CEO of his company and explain it. So he was probably the first practitioner of nps, which I had taken by watching Enterprise Rent a Car and making this. I used their. They had a little system that I thought, I can make this more universal and even a little simpler.

Fred Reichheld:
And that then Scott Cook ran with, put it at the core of Intuit. Apple was an early adopter and if so, these pioneers who put it to work in practical ways. There’s a lot of organizational challenges to get this right, but they saw the potential and it was those guys who proved it worked. And it’s where I, yes, I invested Intuit. And yeah, it’s been a great ride.

Josh Schachter [Host]:
Yeah, you’re referrers, so to speak. I worked for Intuit for a hot minute as a product leader and I remember having the opportunity to sit in a room with Scott and two things. Well, first of all, he’s sharp and he’s just such a great guy and

Fred Reichheld:
he’s a good man. Did that unlike a lot of founders who would say, whoa, I wouldn’t want him, I would not want him doubting my dating my daughter, my granddaughter. You see on it.

Josh Schachter [Host]:
Good. Yeah, you heard it here first, folks. Scott Cook is welcome to date any

Fred Reichheld:
of Fred Reichelt’s friend any day. What is he, my age? 74.

Josh Schachter [Host]:
Oh, man, the LinkedIn headline that’s going to make for my post. So, but, but, but, but we had an ethos they probably still do into it called Design for Delight. D for D. Design for Delight. And so clear, they’re like customer, you know, customer, you know, I don’t, I won’t call it customer happiness, but like customer satisfaction is part of that. And then I do also remember him showing like some kind of like iceberg pyramid. I don’t know the exact image, but it was basically like, here’s my priorities. Here’s our company’s priorities.

Josh Schachter [Host]:
It is if you, if you handle well. Actually, you know what, I’ll be honest with you. I think it was make your, make your employees happy, then they will make your customers happy, then they will make your shareholders happy. But. So maybe it’s not. I was going in the different direction where it was customers first, but nonetheless, let me, let me get back to the question I was asking you though. What do you observe in the way that some of these strongest leaders that have led these companies under your principles here, how do they treat, like, what do they view in the relationships they have with their customers? Even like, tactically, what do you see in how they build those relationships?

Fred Reichheld:
Well, they would never act in their, against their customer’s best interest because that would put their employees in a position of being, let’s say not being their full selves. When you put your teams in a position that try and do something against for a customer that hurts them, which is tricky pricing and fine print and trap and abuse all the baloney that marketers think is Genius. You wouldn’t do that to someone you loved. You wouldn’t want that for a kid. You want your people selling something that they’d want to buy if they were in the other person’s shoes. And so they have that high regard for the, the dignity of their employees. And the only way to enrich the life of employee sustainably is to put them into a structure where they can enrich the lives of customers and be rewarded and recognized for that when they achieve it.

Josh Schachter [Host]:
Join me at Pulse this May in Las Vegas. I’d love to meet our listeners. Come say hi. And your daiquiri in that tall fluorescent cup is on me. Seriously. Use code unchurned for a special rate@gainsight pulse.com when you you first started. Yes. You didn’t actually intend for it to, to be a score.

Josh Schachter [Host]:
You kind of meant it as a system.

Fred Reichheld:
Yeah. Plus I hate surveys. So here I am, stuck. The problem was I had focused most of my work on churn and retention as the, the thing to the metric that you could hold people accountable for. And I built the microeconomics of retention that was written in the work.

Josh Schachter [Host]:
Sorry, just because we are in an audience, a lot of folks here that are B2B SaaS, customer success leaders, they’re on the B2B enterprise side, many of them. When you say churn retention, were you talking more B2C? B2B? Kind of across all boards.

Fred Reichheld:
Retention is the first exponential relationship that I understood after I understood compound interest rates because you get decay rates, they’re exponential. And so my first book was called the Loyalty Effect. And it said, hey, listen, if you increase your retention rate by 5 points, say from 85 to 90%, you’ll often swing the value of that customer. The life cycle cash flow from that customer can swing by 25 to over 100%. So small changes in retention or churn drives this huge exponential change in profitable growth. And that was my focus and it was a big wow. And that was the first part of my career. And a lot of our work was how to help people understand who’s about who, whose might leave, get to them, fix, fit very nicely with the framework that Toyota had made famous with zero defects.

Fred Reichheld:
We called it zero defections. And it ran out of steam because it’s too late in the chain to catch somebody when they’re about to defect. And stopping churn, yes, it’s important, but what’s way more important is to make customers love you so much they give you more business and refer their friends. And I couldn’t Figure out what metric it would be until I set a survey. And look at Andy Taylor’s doing this at Enterprise. Rent a Car with a two or I think it was a two question survey. I bet you we could have a one question survey. And you know, if you’re going to hate surveys, one question is the least hateful thing you can do.

Fred Reichheld:
That’s what we, that’s what Net Promoter was. And it moved up. I called it Net Promoter. I didn’t say it return reduction. I called it Net Promoter Because I saw the brilliant upside is the exponential growth from people coming back from one bringing your friends. You want promoters. But after creating it, I saw 90% of the effort going into churn reduction and detractor elimination, which is good, you know, cutting churn. How can you argue against that? Nobody wants to fill a leaky bucket.

Fred Reichheld:
But that is, that’s like 10% of the upside. 90% is making customers love you so much they become advocates and grow your business for you much more profitably than your sales force can.

Josh Schachter [Host]:
Have you ever seen the movie There’s Something about Mary?

Fred Reichheld:
Oh yeah, that’s Ben Stiller. Yeah, I’ve watched that. I mean this is your showing. My age, but I thought that was very funny.

Josh Schachter [Host]:
It was a great movie. I mean classic. There’s a scene where he’s, he, geez, what’s the word? When you’re on the side of the road and you wave your hand to get a ride, right. Thank you, thank you.

Fred Reichheld:
Geez.

Josh Schachter [Host]:
My age, he’s hitchhiking and he gets picked up by this guy and the guy’s kind of like, you can tell he’s got like some serial killer tendencies. And the guy is telling Ben Stiller all about his idea that he’s, you know, there’s seven minute abs or six minute abs, whatever. He’s going to start five minute abs and that’s going to become his billion dollar idea. So I feel like Fred, like yours is like Enterprise was doing two questions. You’re like, I’m going to do one question. That’s it. That’s, that’s going to be my, my, my groundswell right here from that well, and it’s tr.

Fred Reichheld:
It’s not really one question, it’s one evaluative question. How likely you’d recommend this to a friend? 0 to 10. But then there’s always a follow up and, and why or how could we do better? How could we make you, you know, serve you better? And it’s that open text verbatim or conversation following the score that’s the key to the system. And a lot of people skip that and just, oh, I like that score. I’ll just grab the score and link it to people’s bonuses and make that my thing. That trivializes it. It misses the value. And that’s sort of stupid.

Fred Reichheld:
Why waste somebody’s time with a survey if you don’t care about whether. If you don’t care about the why, the score, don’t waste their time.

Josh Schachter [Host]:
Yeah, it’s the why and it’s the actionability behind it. Yeah. And then, and then you probably see people taking shortcuts too, where it’s like, oh, you gave me a 9 or 10. Would you like to go fill out this review, you know, on this website? And it’s like,

Fred Reichheld:
that’s the least offensive one. The worst ones are what do I have to do to get you to not give me the Car companies are famous. They spend millions and millions of dollars on pre surveys before the survey comes out to find all the. That might not give them a 9 or 10 so they can bribe them with a free oil change or some say, oh my God, there’s. I’ve created these many industries that are wasting everybody’s time manipulating survey scores and survey. You know, why do I hate surveys? They waste people’s time. They are so, so challenging to get samples correct and make it meaningful. And the instant you link it to somebody’s bonus, there is almost no way you’re getting the truth through surveys.

Fred Reichheld:
You got to get 100% response rates. And right now I think response rates on email surveys are about 1% maximum. And talk about a pious sample. It’s the people who you’ve either bribed to respond or they just love you to death. And it’s worth their time because they want you to succeed.

Josh Schachter [Host]:
Okay, so next headline. Fred Reichel, creator of nps, hates surveys but subtitle.

Fred Reichheld:
Oh, you can. That’s a true one. I make surveys. I not only hate them, they’re going away, they’re a waste of energy.

Josh Schachter [Host]:
And it’s because you created a system, not a survey. Survey is one piece.

Fred Reichheld:
And, and I saw the end of surveys probably 10 years ago and tried to figure out what can we do. People have abused it, misused it, that you know the value that’s come through the net promoter survey, it’s 90% through its life cycle. What do you do next? And I went back to Andy Taylor’s idea. Back for more. And bring their friends. You don’t. Those aren’t survey results. Back for more.

Fred Reichheld:
I can figure out how much people are growing their purchases versus the cohort of customers they came in the door with. Or whatever segment is the relevant benchmark. So back for more. I’ve got that in just pure math referral and I called it earned growth in the HBR article. Instead of measuring surveys, just measure your customers and how many of them are expanding their purchases and how many are referring. And that when you combine those, that’s what you’re after. No survey needed. Thank you.

Fred Reichheld:
Unless you call them up and have an AI assisted tool to get to the root cause and sort of come up with hypotheses of why and what do I need to do about that. But referral was the black hole and that’s back when I thought referral was the icing on the cake. The next HBR that people will see from me is going to prove that referral is the cake man, not the icing. And it is measurable. You just have to make sure you know every new customer, what was the primary reason they came and bought and if it’s referral, put that in the customer relationship system and you know, in the permanent record. Keep track of it, get to the root cause of it, figure out who referred them. Make that the core of your learning and improvement so that you can grow from the core, not with marketing gamesmanship of figuring out who could I trick into coming in the door that might not leave too fast so I don’t get caught. Ephemeral low quality revenue is what comes out of most marketing today.

Josh Schachter [Host]:
It’s interesting you and I were talking briefly about the company gong before this call and sounds to me like you’re talking about raving fans and that’s kind

Fred Reichheld:
of their whole thing is Ken Blanchard loved my stuff, I loved his stuff. It it we take a very different approach. But you know, raving fans is a vague idea once when someone refers at least one new customer and doesn’t just say something. But if you can track your customers who delivered at least one new customer through their referral, I.e. call it a raving fan. Call it a true promoter, which is what I call it. That’s where the action is and you got to keep track of it, learn from it and make that the center. I what I find with this HBR article research is that is the strategic metric that lets you know if your strategy is working, how many of your customers are bringing in at least one friend as a new customer who buys at normal pricing and that true promoter score or the ratio of true promoters as a percentage of your whole customer base.

Fred Reichheld:
It sort of tells you if you have a healthy business or not and if it’s one you want to invest in.

Josh Schachter [Host]:
I didn’t realize Clint Metro was behind raving fans. I just showed my colors there. All I know is he’s, I just, I really respect him for the 1 minute manager that’s been a guiding force for me in my career. So did I just call like your Coke? He’s Pepsi. Did I just call your Coke Pepsi? Is that what happened? It’s true promoter.

Fred Reichheld:
I have nothing, nothing bad to say about Ken Blanchard. I think it’s great. I would just say you gotta. But by not just having it as an idea, you have to then turn it into a metric and a system and a set of microeconomics that people understand to invest, to know how do I invest to create another true promoter. Because not all investments pay off. And you have to say, oop, that one didn’t work like Scott Cook or Bezos at Amazon. Some of them need to be cut and thrown away because it was a great, sounded good, but it’s not creating more true motors.

Josh Schachter [Host]:
So okay, let’s, let’s role play here. Fred. I lead customer marketing and executive engagement at Gainsight. We’ve got a lot of initiatives that we manage. One of them is to really well, to show what am I, what am I trying to say here? To praise some of our best customers, some of our folks that are our top users, that the folks that really are great to us and we treat them really well. We’ve got awards and we’ve got a recognition program, an advocacy point system, all those sorts of things. How do I, how do I measure that, measure the ROI on that stuff? Because it can feel a little bit fuzzier to be honest with you, as a manager of that.

Fred Reichheld:
Well, I’ll give you an example that I learned from. It was Bill Bain. I joined Bain in 1977. I think it probably started up in 73ish, 72, 73 somewhere in there. And it was Bill and a few guys left the Boston Consulting Group with this idea that instead of writing reports and fancy, you know, sort of protecting senior executives from getting fired because you could blame the consultant if you were, you know, if you’re any good, you could actually make people money. And Bill was pretty strong on this. So he’s really going to help companies create value for their investors. And they had one client when they left and by the time I joined, I didn’t even know who that was.

Fred Reichheld:
We just had like, I don’t know, seven or eight clients and I think 90% of them were in Baltimore. And I just came in thinking, you know, Bill must, he has sort of a southern accent. He must have grown up in Baltimore or maybe, you know, Virginia or something close to Baltimore. And it’s. No, it’s just because our first client was in Baltimore. And the deal that Bill made was, listen, we are going to put all of our energy into helping you succeed, to make you as an executive team and your investors very happy. But if we, we’re not going to waste money on marketing and gamesmanship and all the other stuff and bribing the professors at the business school, we are going to commit to make you succeed. But as a quid pro quo, if we do it, we’re going to count on you to bring at least, you know, refer us to one or get your board members to be aware of this and what we’re doing.

Fred Reichheld:
And that’s how Bain grew. And that’s why, you know, most of the big businesses in Baltimore were Bain clients, because he delivered on the initial promise. And that’s been the core to Bain’s success through time. It led to Mitt Romney starting a private equity business where you take principal positions because we got good at this technology of creating real value. But the consulting firm continued to grow through referrals. And so I’m no longer a, I’m not in this active partner chain, I’m an advisory partner. But I, I work, I’m an employee for the firm. I think halftime and I care about its success a lot.

Fred Reichheld:
They, you know, when I was a partner anyways, you had a goal of having at least a handful of C suite executives who would enthusiastically refer you if, if asked. And so, and, and we kept track of that at Bain. You know, it wasn’t just sort of a extra credit, it wasn’t icing. It was actually goes into the bonus pool and how it’s allocated. And I think today is one of the two drivers of long term comp for partners. And to make it real, if your customer gets used in a referral for a new client and they become a client, you really should get a portion of the value that is created. Right? And that’s what Bain has tried to do. And I think every business should do it.

Fred Reichheld:
So if you’re with your business, you don’t reward the new customer for the referral, which a lot of consumer businesses do. You reward the team that created that asset, the referring client. And so you gotta have a process to figure out, well, who was the referring client. And in that team of individuals in my company who are the people who. This should be part of their permanent record and affect their career and their bonus. Because when your employees, especially your senior employees, see that the way to really prosper is to build referenceable clients and when they get used, that’s great for them because it makes their career and their recognition and so forth better. They invest. Everybody now is willing to say, oh, referrals are such this wonderful precious asset, but they don’t.

Fred Reichheld:
Nobody gets benefit for creating the asset. Unless you’re in a salesforce where you sort of shoot what you kill, you eat what you kill. If then you get referrals and you keep them for yourself, that works fine. But in a bigger business, a worldwide business, you have to have a way of getting the value creation of creating a referral to be rewarding the person who created the referral or the referenceable asset or they’re not going to invest in making more of them or sharing them with the rest of the salesforce.

Josh Schachter [Host]:
So funny, I just posted that exact sentiment not even realizing we were going to talk about this today. That was my LinkedIn post for today. I was talking about how you’re a VP or above in an organization. I don’t care what function you’re in, if you’re an engineering vp, if you’re a VP of finance, VP of operations, you’ve got a peer somewhere in your, in, you know, in your roundtable groups that you attend every quarter or you’ve got an alumni group that you’re part of that you, you should have some kind of, maybe it’s soft, but a quota as well for bringing business and referrals also.

Fred Reichheld:
Well, how about this as a training program, it works in a company like Bain that has sort of an upper out framework to move from level to level. I’ve lost track of what the training looks like now, but in the old days, to get to the sort of junior partner level, you were supposed to have at least three of these C suite promoters ready to pitch Bain’s superiority in any Bake Off. By the time you were a mid level partner, you were supposed to have six or seven. And before you get to be a senior partner, you should have a dozen.

Josh Schachter [Host]:
And so this is executives, these are

Fred Reichheld:
people, these are individuals that have worked with you and your teams and will go to bat for you and often will go to bat without even getting asked because they are such fans of your work. That set of assets, I mean Bain has the names of the, you know, Everybody’s got their names. And until you get to that level of precision, you can’t reward and you can’t access. That’s where the system needs to be built out today is who are they and who was responsible for bringing that client in. When you win a new client, you should find out how’d that happen? Did referrals play a role? If there were two or three referrals that played a role, rank order them in terms of which one was most important and then get that back to the people who created those assets and don’t say thank you. Make it a big deal. You know, link it to their career and their bonuses and their promotability.

Josh Schachter [Host]:
That’s so cool. It’s a little bit like in some ways what you guys did with Bain is a version of a 360 review.

Fred Reichheld:
Yeah, but you’re bringing in the most important part of the360, the client. Your customer. The one who’s duty. Your duty is to make their life better. Or you’re running a sham fraud business. That’s really totally selfish. Just trying to make yourself rich. Screw whoever you can.

Josh Schachter [Host]:
Yeah, yeah, let’s, let’s talk about. Well, a couple things I want to go back to. Surveys are, are, are going to be dead. They. You’re not a survey person. Surveys are dying. Or they should be at least. Does that kill nps? And maybe that’s your segue to talking more about earned growth.

Fred Reichheld:
That, that is why I invented earned growth like Net Promoter Score. You’ll see my little name next to it because I’m a partial owner of the trademark. Not to stop others from using it, to have a little discipline about what it means and what the words are and how you measure it. You know, there’s this thing with if you don’t have intellectual property, nobody invests in making it work. So. But yeah, earned growth is the next phase. I call it in the HBR article NPS 3.0 NPS. The philosophy hasn’t changed one iota.

Fred Reichheld:
It’s of all the lives you touch, how many are enriched, how many are diminished? That’s promoters minus detractors. Same philosophy. But the way you measure it is not surveys anymore. It’s. You’ve got all these AI tools just keep track of increased purchases and referrals. And those are the targets, the assets that let you know, lives enriched, lives diminished. But use the same basic framework.

Josh Schachter [Host]:
Have you found a way for the CFO to understand the economics of earned growth?

Fred Reichheld:
Ones who really want to understand can, but it takes a CEO who they know cares about this. This is not voodoo economics. You can see the cash flow. For example, I look at, I make the pitch in this upcoming HBR article. This invisible, heretofore invisible referral effect is visible if you start tracking referrals. And an NPS is a pretty good proxy when it’s measured correctly by an NPS prism, for instance. So you take the NPS leader in an industry, compare it to a NPS laggard who’s got a similar business mix and is a good comparable and is public so you can get the data. We found that the SGA as a percent of revenues, which you might think of as your.

Fred Reichheld:
How efficient is your growth? Well, what’s your SGNA as a percent of revenues? Look at relative NPS versus relative SG and a percent. We find that the NPS leader, like a Costco or like an Apple or a Texas roadhouse, Chick Fil A and their sectors of fast, they don’t like that word quick serve restaurants. Their SGA is half that of the competition at similar levels of growth. So you say that actually is 11 points. That’s 11% of revenues that is generated. You know, that’s free cash flow extra that can be reinvested in innovating new ways to delight customers. It can pay your employees more, it can be thrown off to shareholders as dividends. But 11% of revenues, think about what that means.

Fred Reichheld:
And that’s because you’re growing efficiently. And that’s where this referral effect is a big deal. And CFOs, smart ones should say, whoa, I can’t ignore something that’s driving an 11% cost advantage. Well, it’s more than that. It’s a 50% cost advantage. That’s 11 points of revenue. So that’s why I say smart CFOs, that’s who I write for. My stuff doesn’t appeal to the common man the way Ken Blanchard does.

Josh Schachter [Host]:
I sort of, I’m just, oh, shots fired, Ken.

Fred Reichheld:
No, it doesn’t. No, it doesn’t. Right. I’m not a Johnny with shopping bags. I love that stuff. But I’m more, hey, I earned 25% a year cumulative over the last 15 years with my investment portfolio. Show me why. And you know, here’s why.

Fred Reichheld:
That’s, that’s more of a C suite focus. But I don’t know, it’s also love thy neighbor as thyself that appeals to a broad part of the population.

Josh Schachter [Host]:
I want to wrap up on this. There’s this thing called AI that’s moving into industry and it is affecting the way that consumers buy. It’s affecting the way that B2C and B2B companies build, facilitate, nurture, prolong relationships. What does the impact of AI and Agentic have on everything you just spoke about?

Fred Reichheld:
I think it makes NPS better and easier to implement. In the upcoming HBR article I show that if you take your new customer flow across a wide range of businesses, on average 20% of the new customers came because of referral. Great businesses, it’s 70, 80, 90% but. But on average 20% of new customers come through referral. But those 20% generate closer to 80% of the profitable growth. And that’s the wow. That’s the gee whiz that any rational person should want to dig into. And the reason is because referred customers are coming from your true promoters who are really acting in their friend’s best interest because they think their friend is a great fit for this business.

Fred Reichheld:
They’re going to be happy, their life is going to be rich. So incredibly efficient at bringing in future true promoters who are going to keep the exponential growth going. The 80% of customers, new customers who are coming in because of marketing and sales and promotions and discounts, those guys are. They’re low quality, man. They don’t stick around and they create churn and cost. That’s why SG&A is so low for a high net promoter player because they’re really growing through earned growth. Now what’s the world of AI do? AI is not AI bots. Shopping bots are being designed to be immune to advertising, immune to paid influencers, immune to all the SEO optimization baloney.

Fred Reichheld:
And but what are they going to learn from they’re going to learn from the truth. They’re going to learn from legitimate reviews and even more from legitimate customers talking to each other and prospects and even more from like minded similar customers talking to each other. So it’s sort of the Netflix you know what you’re going to like this next movie or Amazon’s engine that’s you’re going to like this next book that’s done correctly. I think that’s the AI bot. So generating more real referrals and referenceable assets is what the AI bot is going to be learning from. So so people who use AI bots are going to be circumventing all the marketing bullshit and go directly. So I think it just accelerates the truth. We are going to get a lot less baloney marketing and a lot more making sure the customer experience is so delightful and remarkable that it’s generating a healthy flow of referrals.

Josh Schachter [Host]:
Fred Reichelt, creator of the nps. Is it the NPS or nps?

Fred Reichheld:
Ah, whatever you like.

Josh Schachter [Host]:
It’s like when football players say the Ohio State University, creator of mps, creator of Verne Growth, Bain fellow.

Fred Reichheld:
Oh, you want to see the picture I have on the wall in front

Josh Schachter [Host]:
of me of Ken Blanchard? Yeah. Let’s see it

Fred Reichheld:
now. That is my life philosophy and that is the idea behind net promoter the world is a better place the more true promoters you create. Everybody is better off. Your investors, your shareholders, your customers, your employees, everybody. And it’s just trying to turn that idea, that soft Ken Blanchard idea into a rigorous set of microeconomics and measurement tools to which CEOs can hold their people accountable and CFOs can do cost benefit analysis in a thoughtful way.

Josh Schachter [Host]:
Fred Reichelt, thank you so much for being on the program.

Fred Reichheld:
My pleasure.