#130 The Power of Referrals: A Classic Episode Revisited

Fred Reichheld is an expert on customer loyalty and a legend in the world of customer experience management. 

He and his "co-pilot" Rob Markey, created Net Promoter System, arguably one of the most used loyalty metrics in the world.

He shared so many gems in our conversation that I decided to produce this edited version as a sort of "greatest hits" episode.

In this episode:

1. Why did Fred feel a sense of urgency to write his book, "Winning on Purpose"?

   • Fred shares a personal story about receiving a cancer diagnosis, which spurred him to focus on writing the book to correct misconceptions and realign the philosophy behind Net Promoter Score (NPS) and customer experience with genuine customer love and improvement.

2. What is the core message of "Winning on Purpose"?

   • Fred emphasizes that the central message is that customer love and referrals should be at the core of a business’s purpose. Companies need to prioritize customer satisfaction and loyalty over other metrics to achieve true, sustainable success.

3. They key metric that most companies don't measure but should be

   • Fred discusses the importance of tracking and measuring customer referrals to drive business growth.

4. What is the "earned growth" model and why is it important?

   • Fred introduces the concept of "earned growth," which focuses on measuring how much business growth comes from returning customers and referrals. 

 

Episode Transcript

(00:08):
Welcome to the Delighted Customers Podcast. I am so glad
you're here. We challenge conventional thinking about customer
experience because I believe that improving experiences isn't just good
for business. It's a powerful way to make a meaningful difference
in people's lives. Each week we feature thought provoking
conversations with industry thought leaders from a variety

(00:30):
of backgrounds, offering you unique perspectives and actionable
insights. Get ready to sharpen your leadership and transform
your approach to customer experience. Let's dive
in. Well, today's
episode is very special because it's a sort of a greatest
hits episode with the one, the only Fred Reichelt,

(00:53):
one of the CX legends who is
a creator of the Net promoter system and recently
wrote a book called Winning on Purpose. He was on the show a little
while back and I'm taking clips from that show highlighting
some really interesting concepts. That we talk about the
world of AI. And he's got a spin of how we should

(01:15):
be using the monies that we're spending on
AI to think about customers and the way
they experience our brand a little bit differently. So we get into that,
we get into the power of referrals and where most
organizations are missing this potential.
Fred does a great job of illuminating on so many topics.

(01:38):
Hope you'll enjoy the episode as much as I did. Let's go ahead
and dive in. Well, I am so excited
today to have Fred Reichelt on the Delighted Customers
podcast. Really, if you've been in the customer experience world for
any period of time, Fred does not need any introduction.
And so excited about his new book,

(02:01):
Winning on Purpose. We're going to talk about that a little bit. But
first, Fred, welcome to the Delighted Customers podcast. Good to be here,
Mark. Thank you. Absolutely. And you know, early on in the
book, Fred, you get very personal very
quick. You talk about
a personal story about your sense of urgency for writing

(02:23):
this book. And we're going to talk more about what white space there was for
the content. But more importantly,
you were overcoming a personal battle and you felt a
sense of urgency and it resonated with
me. But first I'd like you to share from your perspective
whatever you feel comfortable sharing with the audience.

(02:45):
Sure, I shared it in the book. I got a cancer diagnosis
and it was a point in my life where it would have made sense to
retire because it takes all your energy to fight through that if you get
lucky enough to make it. But it actually
spurred me on to get committed to writing that book, Winning
on Purpose. And the reason was it just, it was a

(03:07):
reminder for me. But I, you Know, it's probably a reminder for everybody
your days are limited. What do you want to accomplish while you have the energy
and the time and the. The movement that I,
I think we. We kick started in, in delighting
customers and, and measuring progress based
on loving customers making their lives better. It

(03:30):
was getting off on the wrong course. There were people who were saying, oh,
I've adopted Net Promoter, what a great invention. And then they do it
completely wrong and contrary to the philosophy
behind it. So I. I felt like we really had to get it back on
track. Yeah, gotcha. Gotcha. Yeah. I
mean, and. And you did a great job

(03:52):
and introduced some new concepts as well that weren't in the previous.
But just going back to my own personal experience,
thanking you profusely for the work that you did
and the development of mps. Not only the development of mps,
back when I started as a practitioner
shifting from consulting to work in a bank,

(04:14):
but, you know, promoting it and telling case studies.
I remember a video I saw of you at
Rackspace, and then I think there was one of Schwab,
and then what was the other one that you
shared? So really helpful
stories of how

(04:35):
impactful this whole idea of Net Promoter
and not the score, but Net promoter
system. Do you want to say more about that? Yeah. And the
overarching message of winning on purpose is that
it's not just NPS. And marketing success is one
of 10 things you have to get right. It's the foremost

(04:57):
thing. It's the center of the universe. And the world doesn't
see it that way yet most companies think, yeah, I've got a lot of
stakeholders. Customers are important, but so are
shareholders and employees and the environment and
social governance issues. They're all. And of course they
are. And yet, if you don't pick one as the center of your purpose, your

(05:18):
existence, you just are kidding yourself and you'll give
mediocre results to all of those stakeholders.
Yeah, so. So those are like lagging indicators, right? Those are what
they actually did with their feet. I would say referrals are
very contemporary. Probably referral is the best indicator there is. If you
want one signal in the world that

(05:40):
captures the reality of not just now, but expectations
going forward. Are they referring you to their friends?
Okay. And I want to get more into the earned growth
model that you. That you described in the book. But before we do,
I want to circle back to this listening question, because a

(06:01):
lot of CX practitioners are
struggling with what is the best way to listen
to customers. There's all sorts of ways we can listen or we
can just look at the metrics of what they've
done and how they're, you know, with their sort of operational
metrics. What, what are your thoughts about

(06:23):
best ways to listen? You know, I was with the CEO
of a really big retailer, one of the biggest retailers in the world,
and she said, you know, we learn from our
surveys, but it's sort of biased because they, you know,
it's. It's not. It's an awkward, it's not natural. And,
and they're social. You don't want to get people in trouble and so

(06:45):
forth. Said the place we get the real truth is
when we can listen in on customers talking to other customers or
prospective customers. And if we can find ways. And sometimes that's
in message boards and there are different techniques,
but that's where the truth lies. And I think
companies should be thinking carefully about how can I listen

(07:07):
in to what people who are saying when they refer for us or
refer against us. That's a great idea. So, and. And
there's more and more of that this day and age where there's forums
and people writing reviews or in message
boards and other places. Yeah. And I think there's
one of the things that I think was very powerful in the early days of

(07:29):
Net Promoter was you. You identify a detractor,
close the loop, reach out with somebody senior enough to
actually understand the system and what went wrong and
get to the root cause, apologize, fix it.
That closed loop is brilliant, but we don't do
that with referrals, which is even more important. When you

(07:52):
do something that's so remarkable that people go
out and as an act of love, refer a friend,
you need to close the loop with the person who referred and the person who
heard the referral with the same kind of thoughtful rigor. And
that's where the listening is most leveraged. And I see very little of that
today. So that.

(08:14):
That is a great point. There's a gap there. Right. We might
as well go ahead and jump into the earned growth model,
because what you're saying there is that
there's a whole conversation about corporate accounting and
customer accounting. And
Rob Markey said the same thing about how we really need to

(08:36):
shift our thinking in the way we measure great companies
or company success. Say more about that.
Well, if you think the central, the miraculous
customer love flywheel customers coming back for more and
bringing their friends. If you think that's the center of business success, you should
measure it, and accounting doesn't. Today, my argument is for

(08:59):
heaven's Sakes, you have the digital technology and all these
fancy tools. Why don't you take some of the
budget that you're throwing at AI Cramming
more stuff at customers and thinking you're succeeding because
they're tricked into buying more than they want and say, why don't we take some
of that and make sure we can account

(09:21):
for this flywheel? What percentage of our customers
are coming back and buying more? What percentage are
referring their friends? These are measurable things. Accountants should
be able to figure it out. They just haven't decided it's important enough yet.
Yeah, and so in the book you talked
about this thing you've coined, earned growth rate.

(09:44):
And it's essentially two components, right?
NRR Net Net
Recurring Net Net Revenue
retention, Net revenue retention and
encr. Earned New Customer
retention. Those two components. So you want to break that down for the language? Yeah,
I need, I need another name for that second one. But it's, it's basically

(10:07):
back for more and refer their friends.
Those are the two signals. You know, let's forget surveys for the moment and
other kinds of listening. You got to know if you've won or
lost, and you know you won or lost when they come back for more and
bring their friends. So this customer based accounting is just saying, okay,
how much of our revenue growth is coming from customers who are, who

(10:29):
had the experience and they liked it so much they're coming back and buying more.
That's net revenue retention. And then refer their friends. How many of your
new customers are coming in primarily because they heard good things from friends
and colleagues? Those are the basis
of earned growth and people don't measure it today.
I wrote the book over a year ago. I'll

(10:51):
bet you there's a few dozen companies out there scratching their
head and figuring out big companies who, boy, this is hard.
The way our accounting systems work today, it's not easy. I have to work at
this. And that should be a signal. How screwed up
is your business measurement process if you can't even tell me what
percentage of your growth is coming from the miraculous flywheel and how

(11:13):
and how much is being bought through crazy expensive sales
and marketing gimmicks that tend to bring in customers that have a
negative net present value when you actually do the math right, and this, you know,
throwing sand in the air and confusing everything. And then
listening. Well, let's listen more. Of course listening is good, but let's
listen for wins and listen for losses

(11:35):
and not just listen to any customer that happens to be
bored enough that they respond to a survey. So one
of the things that I want to come back to that you said was it's
really important that we. We not
just close the feedback loop for
customers that have maybe detractors or there's some issue,

(11:57):
but those that love us, those that have referred
us, we need to understand and thank them,
understand, you know, what they love about us and thank them for
really understand what it is they love about us and appreciate. Acknowledge
them. Yeah. And give them more tools to refer us more
effectively. So there's this whole missing

(12:21):
the standard business
thinking is. I think it's. I call
it financial capitalism. It is. The way I
grow is to get more salespeople and
make them more effective and spend on marketing and
advertising and pricing and promotion gimmicks. I mean, that's

(12:42):
how you grow. That mindset is dead wrong. The
way you grow is to delight more customers and help
them refer friends. Being remarkable
in a way that makes people want to come back for more and bring their
friends is the core of true earned
growth, profitable growth, sustainable growth, and for heaven's sakes,

(13:04):
measure that, but also intervene when you see it
happen and close the loop and probe for root causes
and understand how, you know, run experiments, learn.
And right now, we don't even. Most companies have no clue
which of their new customers are coming in based on referrals and which
ones are coming in based on all the marketing gimmicks and

(13:25):
gamesmanship out there. Yeah. And I heard you talk on.
On Rob Markey's Net Promoter System podcast.
There's a plug for Rob. It's a great podcast. I
think CX people who don't listen to that are nuts. Yeah,
no, it's fantastic and very thoughtful and
insightful. And you were on it. You were on it and

(13:47):
you were. Well, I was wanted in two ways. You know, Rob's been my co
pilot for many, many years. So a lot of the stuff that he
says, it was stuff that we talked about a long time
ago. So I. I like Ripples in the Pond. I feel really good about
what Rob's talking about. Yeah. Yeah,
so. So you were on that, on that podcast and you were talking

(14:08):
about companies that, that get it right and companies
that don't. And so I want to spend a little bit of time talking about
what makes a great company.
CX professionals know that every touch point matters.
But managing the entire customer journey can be challenging, especially

(14:31):
for enterprises due to disjointed data, difficulty
aligning stakeholders, and struggling to secure executive
support. That's where JourneyTrack comes in. JourneyTrack
integrates journey mapping, management and measurement, allowing you
to pinpoint friction, optimize experiences, and
demonstrate the ROI of CX initiatives. So you

(14:52):
can align teams, break down silos, and then you can track
improvements in real time. With JourneyTrack, you get
visibility across every channel and touchpoint. No more guesswork, just
clear insights and measurable results. Join the CX leaders who
transform journeys into improvements. Improved experiences with impactful
business outcomes like reduced churn and increased customer

(15:15):
lifetime value. Visit JourneyTrack IO today
and see how better journeys lead to better business.
Great companies love their customers. The leaders inspire their
teams of employees to love customers
because it's the right thing to do. It makes the world a better place. And

(15:36):
if you have systems to recognize and reward the teams and the people
who do it, they got to feel good about themselves. What really
inspires employees is doing things that they're proud of,
making the world better and, you know, loving customers in a
way that it so enriches their lives that they refer
it to a friend. That's the highest compliment that there is. And

(15:58):
you got to have a. That's at the core of greatness. Yeah.
And also in the, in the podcast there, and I'll bring it up here, is
that there's a gap right now. Right. And I know I
experienced that where I was is that we don't
know. And I'm using the general term we. We
don't know where our customers come from. And you just said that.

(16:20):
But erecting gates to track and
measure how client to client referrals or customer
to customer referrals come in is a gap. I see
that. I think people are saying either one. I don't know where to
start. It feels like a really heavy, heavy lift. It's
overwhelming. I agree. And is the

(16:42):
juice worth the squeeze? I think the answer is yes. But
could you say more about that? Is that what you're hearing also is that
don't know where I'm overwhelmed, don't know where to start. In the early days of
Net Promoter, the big constraint was, you
know, getting Survey Monkey or some generic
survey thing going and which customers and

(17:04):
when and who should the responses go to. That
was getting in the way of progress. It was hard. And then
companies like, like Qualtrics and Medallia
and in Moment and others developed technology
platforms that really made it easy
and made the analysis automatic. Very

(17:25):
sophisticated support of business processes. So
those guys really helped launch the Net Promoter
revolution. What is, I think, on the
pioneering edge today and what will get us
Deeper into understanding which
customers are coming on referral and why and so forth.

(17:46):
There's another technology revolution required. And
one of the companies I'm working most closely with is, I hope
is the next Qualtrics or Medallia of the
referral movement. It's called Mention Me. Mention Me is a
tech platform that's making it really easy
to get customers to want to do a referral

(18:09):
through the platform, not through a bribe, but by appropriate
recognition and they know that they're the person they refer will get
a warm welcome appropriately. And as that
gets more frictionless, then you finally got a tech platform
that lets you start tracking and learning and
improving the customer Love Flywheel.

(18:30):
So I just want to. One of the things I like to do is pull
out the gems when I hear guests saying things just so we can double
click on it. And one of the gems there was just the
importance of, of,
of list of, of tracking those customers
that are referring other customers that love us. And it's great that Mention Me as

(18:52):
a is a way that facilitates doing that. But the ability to, to
know that you're doing the kind because if the goal is to create this love
Flywheel, you have to know if you're successful or not. If
referrals are the center of the universe. Yeah.
Then you better have a telescope that lets you see the
referral process in action and

(19:15):
dig into it and probe for root causes and test out
hypotheses. The reason I
mentioned me is the only company in the world that I know
of where referrals is everything. All the other
referral gizmos
and the simple well give bribe

(19:36):
a customer kinds of things. Those are
martech companies that do 20 different things. And
this little add on is part of
the whole shtick that doesn't get you there. You
know, referral is everything. It really takes hard work to
know how much could you reward

(19:57):
a referring customer without making it a bribe? Should it be
a donation to a charity? Should it just be recognition? Should it be sort
of linked into the your loyalty rewards program? But there's
something that's socially right that makes it worthwhile. And
then how do you make it a frictionless process that's transparent to everybody? There's
no gaming here. And then what do you do that's special for that

(20:20):
referred customer that welcomes them in? And you know,
that's a science. And it's just, it's not just a
one little simple process that you can add on to all your other
Martech technology. Yeah,
yeah. So, so we are so the other thing
I wanted to double click on was the, per the this. Because you said it,

(20:43):
you said it well, but you said it. I want to make sure people get
this. This is purchasing customers versus earning
customers, right? So this. And traditional
thinking is. So do, do you tell, do you tell companies
that they don't need to do traditional marketing, whether
it's, you know, social media, advertising, other advertising,

(21:03):
discounted rates to have people come on board? Because I know in banking, which
is the world I came from, we, we
would. And I'm just going to say this, I know what you're going to say.
We would have some sort of promotion whether it was a lower rate to open
or better rate to open, you know, on the other side, lower rate for a
loan or better rate for, to open a checking account or get a CD or

(21:25):
something. And you would get a slew of customers come in and sometimes
the switching costs I guess were high enough where they wouldn't leave
and they'd stay for a while. What do you, what would you say to an
executive of, let's say a wealth management or insurance company
or even a credit union who was, who is. Had a
budget? Right now they're looking at a budget for advertising and marketing and traditional

(21:47):
marketing. Take, take
two groups of customers as, as test groups. One,
you know, came in on referral either because you asked them
or you went back. You know, you have to get that identified
and then watch their behaviors and their economics over the
next few years if possible, but few periods if you want

(22:10):
to make quick decisions and then get a group that came in on the latest
teaser rate or you bought a bunch of Facebook
ad space or Google and search
and just watch the behavior. How much do they buy,
how much repeat, how much growth at what price
point, how many referrals do those they generate? Just do the

(22:34):
math. And what many companies find out is, oh my goodness,
the only customers that have a positive net present value, who
are actually creating value for my shareholders are coming in on
referral and all this other stuff. It, yeah, you
get a few good customers out of it, but you get an anchor
of noisy, demanding,

(22:57):
price sensitive disloyal
churners that destroy the economics of the business
and destroys your service system's ability to
actually deliver great service regularly.
Because you know, if you got customers who really aren't relationship people at
all and they're demanding and jerking you around and they only care about a special

(23:18):
price and you know, they're in the phone queue screwing up the service
levels and probably demotivating your service
staff. Whereas if you're building a business on referrals, you
know, when somebody's unhappy, this is a disaster. You
know, we've got to fix this. You can't afford to have all hands on deck
mentality. If you've got all these turners that you sucked in through the marketing

(23:41):
gimmick fountain. Well you, you did a really good
and eloquent job of describing that because I think some of that gets lost in
the mix is, is when somebody calls up or a
frontline person ends up dealing with an
unhappy customer. Those complaints is a complaint
tracking system. If you're in certain industries you

(24:02):
required to track complaints and that
just adds cost that my guess is most companies
aren't even tracking. I agree, it is.
Rob and I were, Rob Markey and I were chatting the other day about what's
the biggest waste that you see in business today.
And we both agree it is the, the waste of

(24:26):
bringing in lousy customers and having them screw
up your system and screwing up service for everybody else and demotivating your
workforce. So that's the major inefficiency
that I think businesses, if they could clean that out would operate
at a whole different level of profitability.
And, and it's one of the reasons, you know, in winning on purpose we show

(24:48):
the companies who have the highest NPS measured
correctly. NPS Prism, the
Bain subsidiary that really measures
NPS scientific rigor
like it were a medical research double blind, you know,
large panels correctly structured. The highest

(25:10):
NPS companies consistently are the ones
delivering great returns to their shareholders. We look at a
number of industries and not only is do the top NPS companies
win for their investors, it's almost a perfect line. The
guys with the worst NPS deliver the worst results for their investors and the guys
with the best are knocking out of the park. You know, the Costco's,

(25:32):
the apples, the people who you can't really enterprise rent a
car, Chick Fil A. Why are they so profitable? If you
apply traditional financial capitalist mindset,
you can come up with all sorts of reasons, but they're not the core
root cause. The root cause is they are just running this
incredibly efficient customer machine that only invests

(25:55):
in the kind of customers they can turn into promoters who are the true
assets of the business. They come back for more and refer their friends.
Well, that is where we're going to have to end our conversation
today with Fred Reichelt. What a great conversation it was.
So much information and insight around the power of
referrals from one of the CX Legends authors

(26:18):
and Bain fellow Fred Reichel. I hope you enjoyed it as much as I
did.
I hope you enjoyed this episode of the Delighted Customers
podcast. It would mean so much if you would take a moment to subscribe.
You can go to Apple, Spotify, Amazon Music, or wherever you

(26:39):
listen to podcasts. Click on the plus sign or follow button and that
will ensure that you don't miss an episode and it helps get the word out
to others. While you're there. I'd love it if you'd leave a five star
review. I look forward to seeing you back here next Thursday.