Written by: Ben Goodey, Head of Growth Marketing at CustomerGauge
The Net Promoter System evolved once again in late 2021 with the addition of Earned Growth, the account-based metric that, according to Bain & Co. (creators of NPS), “provides the organizations that use [Net Promoter] with a clear, data-driven connection between customer success, repeat and expanded purchases, word-of-mouth recommendations, and business results.”
But what exactly is Earned Growth? Why was this update needed? And how can B2B and B2B2C organizations start to implement it?
Let’s answer those questions here.
WHAT IS EARNED GROWTH?
It’s no secret that customer marketing, customer success, and customer happiness underpin some of the fastest company growth rates of the last few years.
Companies like Slack, Zendesk, Zoom, and Snowflake owe their success to high retention rates and continued account expansion.
This post shared by Jason Lemkin (above) highlights the concept that is at the heart of Earned Growth. And note that it doesn’t just apply in the SaaS world.
Across new and traditional businesses alike, the most successful of the crop earn their growth thanks to the quality of their service and products – aka the quality of the customer experience.
When you earn your growth, your product value meets your customer’s expectations and they keep coming back for more, spend increasing amounts of money, and refer your business to their colleagues and friends.
Imagine you have two companies, A and B, both with a 20% annual revenue growth rate.
Company A gets most of its growth through Net Revenue Retention (i.e., account expansion from existing customers) and Earned New Customers (i.e., customer referrals). This company has good growth—it’s earned; it’s less risky; it’s sustainable; and it shows a coherency between customer expectations and product value.
Company B is growing at the same rate, but they buy their growth. The majority of that 20% comes from new marketing and sales campaigns. This growth can be manufactured by spending more on acquisition, by heavily discounting, and by adding risk into the customer base. Such a high growth rate is often unsustainable without outside capital.
Which company would you rather be?
WHY WAS IT DEVELOPED?
The concept was introduced by Fred Reichheld and Maureen Burns in their Harvard Business Review article, NPS 3.0.
As the name of the article suggests, it was developed as the next generation of NPS because an evolution was very much needed.
Let’s take a look at some key points:
- Net Promoter was in danger of becoming a vanity metric. Inexperienced practitioners of NPS would create bias by linking NPS to frontline bonuses or report their score publicly without explanation of how many customers were surveyed or without other key supporting metrics. To make Net Promoter work as it should, Fred and Maureen developed Earned Growth to ‘illuminate the quality of a firm’s growth’—now NPS must be supported by the audited revenues that contain no bias.
- Maureen came on our podcast to discuss customer love. She notes that, as an accounting-based metric, Earned Growth ties experience directly to financial results. For far too long, CX professionals have struggled to prove the ROI of their work, but now they have the opportunity to do just that. As we mentioned here years ago, the first step to proving the financial value of a voice of customer program is to actually measure retention and referrals—something so few companies actually do.
- Referrals are under-appreciated. Firms today undervalue referrals. They treat them as icing on the cake rather than as an essential (perhaps the most essential) ingredient for sustainable growth. Earned growth brings them to the forefront of C-Suite strategy.
In short, their goal was to bring back credibility and authority to customer experience programs while offering professionals the tools to do so.
HOW CAN B2B ORGANIZATIONS MEASURE EARNED GROWTH?
The rules of B2B customer experience are not the same as in B2C. Sample-based surveys don’t make much sense, and response rates from multiple stakeholders in each of your top accounts should be the priority of your NPS program.
Our 2021 B2B CX Benchmarking report found that:
- 44% of companies do not measure their retention rate
- 63% of companies don’t track referrals as a result of their experience program
- 62% do not calculate the ROI of their experience program
- 70% do not link experience data to financial results
These statistics make it evident that most B2B companies need to start understanding the impact of their customer experience programs in the context of wider business goals and linking them to these desired outcomes.
Here’s how to get started measuring your Earned Growth rate.
- Measure Customer Referrals (‘Earned New Customers’)
Whether you’re a large enterprise or a small business, it can be quite simple to track customer referrals.
The first thing we recommend doing is asking “How did you hear about us?” up front. For example, when customer’s reach out to us to learn about our products, they must fill in a form with their data. Six months ago, we added the above question, and the insights are incredibly useful—we not only know that they’re a referral, but they often tell us who referred them to us.
You can also ask this question at any point in the sales process, for example in a post-meeting survey.
With either approach, you’ll need to look at those who actually became customers at the end of each year and tag them with “referral.” You then have a ready-to-go dataset to look at things like what the average revenue of a referred customer is vs. one acquired by marketing.
With this data, you can then calculate Earned New Customers (ENC)—the percentage of your revenue that came from referrals.
- Measure Net Revenue Retention
You can learn all the retention rate formulas here, so I won’t focus on the different variations available to you.
Instead, let’s focus on Net Revenue Retention (NRR). NRR calculates your revenue retention and also includes the value of any upsell or downsell.
If you have an NRR of more than 100%, you’re experiencing negative churn—revenue is growing faster from upsell than it’s being reduce due to churn.
The formula is fairly simple, but it requires you to have revenue tracking in place.
You’ll need three elements:
- Rs (amount of revenue at beginning of measurement period)
- Se (amount of upsell or downsell during the period)
- Re (Rs-new customer revenue, which means how much of the starting period revenue is still retained)
These three elements need to be tracked closely to start measuring NRR, but once in place you’ll be able to set goals for increasing the rate.
- Calculate Earned Growth
Earned Growth is calculated by simply adding NRR and ENC together and subtracting 100%.
For example, if your NRR is 120% (like Zendesk’s is in the earlier graphic), and your ENC is 33%, then your Earned Growth Rate = 53%.
A NOTE ON TYING CX TO FINANCIAL RESULTS
For years we’ve pushed our network to link financial results to their Net Promoter program (to “Monetize” NPS). With account size attached to NPS scores, you can understand things like:
- How much revenue is an NPS driver putting at-risk?
- Are my largest 20 accounts leaving Detractor scores?
- Which relationships are most important for my account managers to focus on?
- Which accounts are ready to be upsold to?
With the addition of Earned Growth to the official Net Promoter methodology, we’re happy to see the community moving in the same direction. Understanding the link between experience and financial results is key to how we’ll continue to elevate the customer experience mission.