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Interview

Interview: The Unbeatable Strategy of Loving Customers

Fred Reichheld has spent a career at Bain creating and advancing the Net Promoter Strategy at some of the world’s greatest companies. And he knew it worked, not only to drive happy customers, but also outstanding financial success. In his new book, Winning on Purpose, he brings the receipts to prove it. Full of data, case studies, and practical approaches, Fred outlines the path to turbocharge your loyalty growth engine using the most efficient and sustainable fuel ever invented: happy customers coming back for more and referring their friends.

Show Notes:
Winning on Purpose - The Unbeatable Strategy of Loving Customers

Transcript:

Peter Crosby:
Welcome to Unpacking the Digital Shelf, where we explore brand manufacturing in the digital age.

Peter Crosby:
Hey, everyone, Peter Crosby here from the Digital Shelf Institute. Fred Reichheld has spent a career at Bain creating and advancing the net promoter strategy at some of the world's greatest companies. He knew it worked, not only to drive happy customers, but also outstanding financial success. In his new book, Winning on Purpose, he brings the receipts to prove it. Full of data, case studies, and practical approaches, Fred outlines in our conversation the path to "turbocharge your loyalty growth engine using the most efficient and sustainable fuel ever invented, happy customers coming back for more, and referring their friends." Here's that conversation.

Peter Crosby:
Fred, thank you so much for returning to the podcast. I am really grateful and very excited about discussing your new book. Thank you.

Fred Reichheld:
Pleased to be here.

Peter Crosby:
You've contributed so much to the world of customer service, delight, and business success. I mean, through your development of the net promoter score and system, and by building the loyalty practice at Bain, and in reading your latest blog, Winning on Purpose, I felt like you took every barrier that human beings have put in the way of adoption of this system, "It's too hard. It's too expensive. This can't possibly work for my business," and with love used a career's worth of data, case studies, and practical examples to beat every one of those barriers to a pulp. Did I read you right? Is this kind of your call to action and, "Please, there's no excuse for not adopting this"?

Fred Reichheld:
I wouldn't put it that way. I would say-

Peter Crosby:
Maybe that was just me.

Fred Reichheld:
... there's an awful lot of evidence that this approach works, but there's also a lot of humility in that we have a long way to go to get it completely right. But I suppose I would agree, any right-thinking business person would have a hard time ignoring the call to action that you just have to get feedback from customers and employees about how well you're living up to this standard of golden rule behavior, not just because it's a nice thing to do, but because you owe it to your investors. If your customers don't love doing business with you and come back for more and bring their friends, then there's no evidence that you can outperform the Vanguard index fund as a hurdle rate, which means you shouldn't bother being in business. We can cut your investors, be better off diversifying their money into an index fund.

Peter Crosby:
Yeah, I love that example that you gave, that seriously, just look at Vanguard, "Are you doing better than that or not?" Yeah.

Fred Reichheld:
Otherwise, stop working so hard, and just put your money in Vanguard. But yeah, there are a lot of reasons people misunderstand, and I think most people that think they're doing that promoter now are misusing it and abusing it unintentionally, so part of the book was getting people was really to get the NPS movement back on track.

Peter Crosby:
I love that. You talked about the golden rule earlier and the way you communicated it in the book was "Treat customers the way you would want a loved one treated." Ultimately, you rolled it up to enrich customers' lives. Did I capture that correctly? Is that sort of how you think about it?

Fred Reichheld:
Yeah, there's a lot of confusion around the golden rule, that some people do unto others as you'd have them do unto you, and then Jesus raises the stakes and goes, "Love thy neighbor as thyself," that's even a higher standard. But then people say, "Well, wait a minute. If I like chocolate ice cream, that doesn't mean I should give it to everybody." I think that's a pretty superficial misreading of the Jesus message, but I think the language of treating others, customers especially the way you'd want a loved one treated, that one gets rid of the confusion, and it's essentially what net promoter measures when it's being done right. It keeps track of all the lives you touch. How many are enriched? How many are diminished? We call them "promoters/detractors," but it's pretty clear the connection.

Peter Crosby:
Yeah. As I was reading the book, I could feel the inspiration around thinking that way and focusing your business that way. But in the back of my head, the buts did start to come up, "But what about ...? Gosh, can you really get investors to go along with that?", all of that sort of stuff that stands in the way. That's where I feel like you spend a lot of time in the book talking about how this drives financial success. Can you break down that barrier? Can you really explain that proven linkage that you have in this book between this investment in delighting customers and the company's actual financial success? Because I think it's so strong in the book. It comes out really strong.

Fred Reichheld:
Well, there's a lot of bogus net promoter data out there. People say, "Well, we've measured our score and it's 83 and that's the highest in our industry." They probably think it's right, but it's not. One of the things that Bain has done is created a data business called NPS Prism, which measures NPS in a very rigorous, scientific way, double-blind in the highest research standards, and so now, we see what the net promoter results are for competitors across an industry.

Fred Reichheld:
As you look at the NPS leader in each industry, I have invested my own money in it over the last decade, and I've tripled the stock market, tripled that Vanguard index fund. What I put in the book is the microeconomics that explains why that's the case. It's not just luck. It essentially is that the accounting mindset, the financial capitalist toolbox does not let you see the flywheel that drives all progress and prosperity in business. It's sort of shocking given how many years people have been doing business, but the guys who really understand this see that it's treating customers so they come back for more and bring their friends. That is the only success flywheel. But accounting doesn't tell us how many customers we have, whether they're coming back each year, how much more they're buying, and certainly not whether they're referring to their friends, so it's opaque, it's invisible, and yet it's the underlying engine that drives all profitable growth.

Peter Crosby:
We live in a world of such uncertainty now. You know what we're all going through at this moment in time and what we've been through over the last couple of years and it seems like we're going to continue to be in a stage of some version of chronic crisis for the foreseeable, let's put it that way. As I think about what that means for brands, what brands are seeing right now, of course, it's all the things that we're starting to see. They're seeing inflation, they're seeing supply chain problems, they're seeing obviously the upstarts coming up and stealing away margins, and of course, just the struggle of figuring out a new brand of commerce and the cost of acquisition for new customers is going up dramatically.

Peter Crosby:
When you look at all those things, the power that drives the flywheel, to your point, is within their control, even outside of those, the thing, the things that might be driving disruptions in society, and that is the power of your customers. One, does that resonate with you, and how do you make that shift from financial capitalism to customer capitalism, to make some of those right investment decisions?

Fred Reichheld:
Well, part of it is reading the book. It's a framework of explaining successes and failures that I think it's pretty close to incontrovertible right now, given how much evidence we've collected, but it really is contrary to the way most people view business, all of the incentives, our governance systems, our progress metrics, how we set our capital allocation, it's financial accounting. As I said, financial accounting leads to a mindset where profits are the purpose.

Fred Reichheld:
That doesn't lead you to greatness. Success is selling more stuff, as opposed to in the cap customer capitalist world success is doing things for customers that turns them into promoters, so they not only come back for more and buy more stuff, they refer their friends. That level of remarkable experience, you've enriched their life so much, they want to share it with loved ones, that's what a referral is, that's the real appropriate target for a business, and it demands higher levels of innovation. It means we got to strive to be remarkable not to as satisfy our customers, which of course, is hard work, but I think what the book makes clear is that's the only way to deliver long-term shareholder value, and it's really the only way to deliver a great career opportunity to your employees that they can feel proud of.

Peter Crosby:
That's what I love about so many of our listeners, I believe, will be future C-level people at brands simply because they understand the marathon and the sprint of what it means to be an active brand and a growing brand in this age. They understand the digital underpinnings that are now driving a lot of the growth for their companies and they also understand what it takes to drive confidence and loyalty at a distance because of the digital divide.

Peter Crosby:
Then if you combine that with understanding commerce at large, how that translates into an in-store environment, things like that, I think they bring a lot of that combination of right brain/left brain to the job that pretends, I think, for future leadership. When you think about what are the leadership qualities of somebody that's interested in making this thinking part of how they approach their jobs, what's the most important leadership quality that you think of if you are beginning to think in this method?

Fred Reichheld:
I think successful leaders commit themselves to the success, wellbeing, and happiness of their team members. That's their primary job. If they truly love those teams and understand that the leader can't give happiness, only customers give true happiness. The job of a leader is to help their teams embrace this mission of putting customers first and enriching customer lives, and then to ensure that they can succeed on that mission and receive the recognition and rewards that is appropriate when you do earn standing ovations from your customers when they give you tens and extensive verbatim congratulations. That's a leader at any level. I think this notion that your leadership job is primarily to maximize shareholder value, or that it's to make your teams happy, they're just flawed ideas. Your job is to help your teams earn happiness by delighting customers.

Peter Crosby:
The underpinning of that is having a clear process to drive those behaviors, right? That's really, a lot of the book is focused on making very clear what those processes are and practical methods, I think, for eliciting the right results. Did I capture that correctly?

Fred Reichheld:
There are lots of tools and processes. I think there will be many more as this movement gains strength. But the reason the book's called Winning on Purpose is not because I think purpose hasn't been heavily covered since the Bible and before, it's that without the right purpose, you have no chance of success. Most businesses, I think around 90% of businesses, have embraced a purpose that's guaranteed to fail because it's something other than putting customer interest first, which is, I was shocked when we asked business leaders across the world, "What's the primary purpose your organization exists?", only 10% said, "It's to make our customers lives better." I think when you're in a company where the leadership purpose is off-center, you either have to get it on center, or go work someplace else because it's not going to lead to victory.

Peter Crosby:
If you could, bring one of your favorite case studies to the fore of a leader that made the choice to move towards this because in this active investor environment that we're in and quarterly results and all that, it must take a lot of belief and inspiration and leadership, but also attention to detail to make this kind of move, and I'd love to hear one of the stories that really stands out for you.

Fred Reichheld:
Oh, one of the remarkable ones that I cover in the book in several chapters is T-Mobile, the mobile telephony company that was the worst in the industry, seven, eight, nine years, worst churn, worst economics, worst technology, I mean, they were horrible. The new CEO came and said, "It'd be tempting to go off in another direction and find that magical customer segment or that and forget about all these unhappy customers that we have." Instead, they said, "Actually, there's only one way to resurrect this brand. We have to take our existing customers and make sure they love us."

Fred Reichheld:
They went around, listened to customers in the stores, they listened to frontline teams about what was getting in the way of them delighting customers more consistently, and then they made those changes. They got rid of the crazy lock-in contracts that lawyers got rich on because there were like five pages you had to sign to get a mobile phone service. Give me a break. Roaming fees, they got rid of those. Just one after the other, they got rid of these bad profit ideas, and went from the weakest net promoter score in the industry to the top, and at the same time, they had the highest total shareholder return in the industry.

Fred Reichheld:
That's one of the things that I don't think people quite understand. I mean, the reason they have these lock-in contracts and roaming fees and gotcha breakage and gimmicks, and is because they're operating in a profit-as-purpose mindset that accounting leads you toward and they don't see the only way to be economically sustainable is to get customers to come back for more and bring their friends. You do, you cannot hire enough salespeople and enough advertising campaigns and months to overcome the lack of ability of those customers coming back for more because if they're not, and they're telling their friends to stay away, you're just never going to have a profitable growing brand.

Peter Crosby:
You had that in the data. You said, "The companies that focus on financial proof performance through the lens of maximum shareholder value, the 'good to great companies'," as you call them, "delivered only 40% of the median market performance, while the ultimate question, 2.0 NPS exemplars," and you can explain that, if you wish, but essentially, people that were following this model delivered 510% of the median return.

Fred Reichheld:
Yeah. I'd heard a lot of these claims of all sorts of different specialists and consulting firms, "Oh, the best places to work. We beat the stock market," and, "Oh, the most satisfied customers. We beat the stock market." As I dug into those, they were baloney. No one ever put their money on the line and had results they were proud of. Otherwise, these would be multi-billion-dollar hedge funds, so I said, "I'm going to just take my own personal money and invest it in the companies that have the highest net promoter score in their industry." It was Costco in warehouse retailing and it was T-Mobile in mobile telephone and it was Amazon in online retailing and that group, it was a dozen-ish companies, tripled the stock market.

Fred Reichheld:
Then over time, I created something called the Fred Z, I'm Fred, so F-R-E-D stock index. I kept adding the companies as we discovered them through Bain's NPS Prism data, what companies were number one and invested. Texas Roadhouse was one of those and we discovered that Tesla had the highest NPS in the auto business and that the performance versus the stock market continues. You gotta ask yourself, "How is this? Why isn't the market ...? It's a perfect market, right? It's incorporating all the financial data right away." The issue is the market operates on a financial mindset. They don't have this data on NPS that's reliable. They also just don't see its powerful connection to that flywheel of customers coming back for more and bringing their friends

Peter Crosby:
Fred, one of those things, you talked a little bit about in the book that the NPS process in the past, it always relied on customers taking surveys, but it sounds like with Prism data, and there may be other digital tools that can help arrive at that data without necessarily relying on that precious survey. Is that true? Because I would imagine that would help with getting a consistent, reliable source of what really is going on out there.

Fred Reichheld:
Yeah, you really can't look at your own internally-generated net promoter data and compare it to other companies. The only way to get reliable comparables is to do double-blind market research using panels of customers carefully selected. That's expensive. That's why NPS Prism thinks there's a business there and they're doing quite well. It's expensive, but if 10 people are buying the data, maybe it costs a ninth as much so that there's some profit margin for Prism.

Fred Reichheld:
But the other kind of NPS is self-generated, and that's powerful because you can loop with promoters and attractors, learn the root cause, take the implications, and act on them. That's how you run an NPS process inside the business, and if you're measuring it consistently, you can see somewhat if you're making progress, but your competitors are making progress, too, at the same time. The only way to know if you're really gaining on the leader or stretching your lead is to have this third-party research. I'll tell you, the best companies are doing this. Amazon does the classic market research kind of NPS on every category. I can't remember if it's four times a year or twice a year, but that's how they think about success and failure if they want to be gaining or extending their lead with a net promoter correctly measured at the brand level. They're not doing it everywhere. Chewy is beating them, Chewy in the pet supply business. But Amazon knows that, they didn't have to read my book to figure that out. It's just, it's a real informational advantage.

Peter Crosby:
You mentioned Chewy. Why do you think Chewy is beating them? Because certainly, that's in our arena here, right?

Fred Reichheld:
Well, I invested in Chewy because I saw they had over a 20-point NPS advantage versus Amazon, and Amazon is good. Amazon was better than Target and some of the other specialist pet supply companies. Why do they do it? How do they do it? Well, I think they have this philosophy of delighting customers at their core, everything I've read about them and their IPO statements. They knew, for instance, they reported their NPS advantage when they went public to investors, as if that mattered, and they knew it matters. Not to all investors. Most investors don't know how to interpret that data.

Fred Reichheld:
Then they're doing things like they have over 100 people in headquarters, even though they're a purely digital remote company, like an Amazon where you shop online, you order online, get delivered to your doorstep, and yet there are over 100 humans at headquarters down in Florida, figuring out how to wow customers. They've come up with cool ideas, all the way from sending birthday cards to pets, to customized artwork for pets, to when a pet dies, they send flowers. It's just things you wouldn't expect from an online retailer. The mentality spreads all the way through, including the people who are doing the coding and user experience work for the online part.

Fred Reichheld:
My pet-owning friends tell me it is so easy to order the right kind of dog food and have it automatically shipped on the right rhythm. But if you're away traveling, or you're going to order some toys, you can either postpone that order, or consolidate into one box so you're not wasting the planet's resources. A lot of online retailers have that functionality, but at Chewy, it is so simple that it shows that people can care about you and your time and that they're not just trying to sell you more schlock by having this repeat order, no matter what. They make it really easy for you to get the right amount of food or veterinary supplies when you need them.

Peter Crosby:
The golden rule.

Fred Reichheld:
Yeah.

Peter Crosby:
Yeah. Yeah, it is.

Fred Reichheld:
You can feel it. You can feel it in an online experience, "Do these guys love me or do they see me as somebody they can sell more stuff to?"

Peter Crosby:
Yep. I'm going to quote you to you if you don't mind. Forgive the sound, there's some work being done next door. "When you put an overriding emphasis on enriching the lives of customers, those customers come to trust that you will act in their best interests. When you earn your customer's trust, they openly share their needs and vulnerabilities. They provide honest feedback, which helps you design and deliver optimal experiences. They integrate your products and services into their daily lives and depend on and contribute to your continued prosperity. They treat your employees with dignity and respect. These factors turbocharge loyalty growth engine, accelerating you pass the competition, using the most efficient and sustainable fuel ever invented, happy customers coming back for more and referring their friends." That paragraph just leapt out at me from the page.

Fred Reichheld:
Yeah, I still agree with it. I could probably say it with fewer words, but that's the idea. It's so commonsensical. Most people who read this will say, "I think we must be already doing this," but they're not. Ask your coworkers, ask the people, the teams that work for you to read the book, and then what they see that's different, and what we would need to change inside the company to actually live these principles. I think they'll get some surprises. This is a book, by the way, it wasn't written, I mean, it's good for CEOs in the C-suite, but this is for frontline teams to have reading groups and talk it through and come to conclusions about what needs to change here to actually, to follow this model.

Peter Crosby:
I love that. That's one of the things that I wanted to ask you about because can somebody in a frontline team wag that dog? Essentially, how much can you do if you're fighting a different leadership principle that happens at the top? How have you seen that? Have you seen that work? Then does it germinate upward, or at least you can make a difference in your own area, or how do you think about that?

Fred Reichheld:
I think most senior executives accept this idea pretty quickly. Too many of them think they're already doing it throughout the organization, so what the lower rungs of the ladder, the more junior people have to do is make it clear to leaders where the disconnects are and where we're actually earning bad profits or doing things to our customers that don't make me proud.

Fred Reichheld:
The evidence is pretty powerful that a board of directors, the group who is responsible for long-term investors' interests, should care. I think they, too, they're smart guys. They'll get it. They probably don't know there's so much evidence. What they don't know is that there is no other way to win. I think this book makes it pretty clear that it's hard to have a sustainable profitable growth business without tapping into your customer resource, but the middle of the organization, the front lines, they're the people who should take responsibility for communicating upwards where we are inconsistent with the principles in the book. Frankly, if leaders don't buy this and they continue to demonstrate that they're just takers, and not everybody can quit their job right today, but over a period of years, go somewhere else, and commit yourself to a business that really does have a purpose that's worth the hard work and struggle.

Peter Crosby:
I love this idea of book clubs and people really thinking about this. You have some great questions in the book that people can ask to figure out and diagnose and then some steps you can take to sort of start to build out programs that will be looking for this, yeah?

Fred Reichheld:
Yeah, I almost put discussion group questions at the end of every chapter. The book was about 10,000 words longer than the publisher wanted, so we cut those, but we're going to be putting those, or maybe they're already on Bain's Net Promoter System dotcom website.

Fred Reichheld:
I've seen now a number of companies using book discussion groups as very powerful ways to get the ideas in the book understood. One of the companies that I work with is BILT, the app that gets rid of paper instructions and gives people a really good initial assembly and then first-use experience. Well, I was down at BILT at their headquarters and sat in on one of their book discussion groups where the CEO was leading a group. Most of the employees at that point, who had already been in small team groups discussing two of the chapters. The level of insight and comment was so sophisticated. I was really impressed. These are all frontline employees and it made me recognize every company should be doing this. If you're going to change the mindset away from the financial capitalist accounting mindset and move toward a company that's built on purpose and principles, what better way than to get everybody talking about what those principles are and how we need to change to live them consistently every day?

Peter Crosby:
Fred, you mentioned BILT. I know that's a company that you are involved with. It might be a useful construct because I feel like what BILT is doing is focused on, as I understand, a very particular stage of customer delight, and conversely, frustration when they get a new product. Can you just bring to life how companies that are using BILT are changing that moment of truth in the process?

Fred Reichheld:
Yeah, it's the welcome when you get the product flat packed on your front porch and you got to figure out how to assemble it and use it for the first time, BILT gets rid of the need for these crazy and incompetent paper instructions that some engineer oversees that had a different primary language must have developed because they're all so horrible. They turn it into a really clever 3D instruction set that you can manipulate like you do all the images on your phone or your smart pad. It has verbal prompts that in whatever language is your language, takes you through it.

Fred Reichheld:
Now, getting that welcome right is very leveraged. If you're in the hospitality industry, if you're in anything, any business, the welcome, when you walk store, if you feel comfortable, that you're welcome, and you know what you're doing and you're not going to make a mistake and you look stupid, that's most one of the most leveraged episodes in the customer journey. I was impressed by what BILT could do and will do there. But to be honest, I'm even more impressed with their philosophy that they exist to help their customers, their brands create promoters out of their customers, and that idea of my purpose is to help you succeed, that's the winning strategy. Then how they've used the book, it's very creative. In fact, I'm encouraging them to build a video tool, an instructional tool so that others could use the book discussion group process that I was so impressed with.

Peter Crosby:
I love that idea. I mean, I'll quote you to you again, when you talk about the persistence that it takes to do this process. You say, "Effective leaders have to create systems to enforce the right tendencies in their teams. They have to be creative and develop systems to embed and reinforce a golden rule culture focused squarely on the purpose of loving customers." Then you did say, "Only the most senior executives have the power and perspective to build and nurture such systems." But it sounds like the level that touches the customer every day has the power to inspire that journey through highlighting it. Am I reading you correctly there?

Fred Reichheld:
Yeah, I use the koi metaphor. We have a koi pond and one of the reasons I like koi is because I think persistence is so vital in everything we do. It turns out that koi evolved from fish that were living in the miles of freshwater rivers in Asia and so the koi had to swim against the current of that river its entire life or it would be washed out into the saltwater sea and to its death, and therefore, it is the symbol of persistence in Chinese art.

Fred Reichheld:
I think it's a valuable metaphor because the river, the current that exists in every business, is created by the need for profits and revenues and financial metrics regularly. You're pounded with those every day, day in, day out. It's how you pay bonuses. That river flow is powerful. If you want to fight against that and not be washed out to your death, you have to instill in your team this ability to regularly 24/7 have discussions about principles, delighting customers, progress on those fronts, golden rule treatment of people enriching lives versus diminishing. If you just do that once a quarter or once a year, it's not enough to counteract that steady flow that the accountants have put into our lives.

Fred Reichheld:
It is true, only the most senior executives can create a system that runs the business. That's their job. The guy that ran P&G for many years, very, very capable guy, wrote a HBR article, and he said, "There's only a few things the CEO and only the CEO can do," and he said, "and one of those is to determine how this business measures success." That essentially is the most persistent system is, how do we measure success? How do I link that to teams? How do I illuminate it to the group? Most companies have a long way to go there.

Peter Crosby:
Your book is full of examples of those CEOs and how they've done that. Then when you pair that up with the incontrovertible proof that superior financial performance has come as a result of that, I hope this will be inspiring to every layer in the organization, and Fred, I thank you for your persistence in creating and advancing and continually revisiting how this system can be put into place to drive a better world for all of us, frankly. Thank you for writing it and thank you for joining us on the podcast.

Fred Reichheld:
My pleasure. I've been at this for 45 years, but I think I've got a few more years ahead of me of hard work because it's a long journey, but I am very impressed with progress, and I hope people will dig into Winning on Purpose and see what we really mean about this. It is the only winning strategy. Loving customers is the only way to win.

Peter Crosby:
Well, we'll certainly put a link to the book in our show notes. The book's title again is Winning on Purpose: The Unbeatable Strategy of Loving Customers. Just put that into Google and you will find your way to the book and I recommend it highly. Thanks again, Fred.

Fred Reichheld:
My pleasure. Thank you.

Peter Crosby:
Thanks again to Fred for the great discussion. We put a link to the book's Amazon product detail page in the show notes. Thanks for being part of our community.