Right said Fred:
Fred Reicheld may not be a name known to many. But his invention…. The Net Promoter Score (NPS) will be more familiar. Yes… he’s the guy behind every customer feedback survey that you been asked to complete with the question “on a scale from 0 to 10, how likely would you be to recommend our company to a friend?”.
Reicheld first wrote about the NPS in the Harvard Business Review (HBR) nearly 20 years ago ( ‘The One Number you need to grow’ HBR December 2003) and now the metric is used by two thirds of top companies.
The popularity of NPS is growing in the real estate sector too and we explain more about how to use this metric in our blog (NPS – customer loyalty). It’s not a metric for the faint-hearted as it requires customers to give a rating of 9 or 10 to be counted as brand advocates. This is a very high bar for an industry not traditionally renowned for treating tenants as customers.
If you’re a fan of the NPS approach I’d commend you to read the latest article by Bain and Co’s Reicheld, Darnell and Burns called “Net Promoter 3.0 – a better system for understanding the real value of happy customers”.
You’ll be reassured that Reicheld is not reinventing his scorecard but is tackling the holy grail subject of how to measure the link between loyalty and business performance. It’s a subject that we’ve been championing in real estate over the past 15 years and I have to thank Assoc Professor Dr Danielle Sanderson, now teaching at UcL Bartlett, for her excellent doctoral work. Her PhD thesis demonstrated that increasing customer satisfaction by one point on a five-point scale produces a loyalty bonus on 1.9% pa total return.
With this in mind, I was fascinated to discover that Reicheld, the guru of NPS, had turned his attention to developing a complementary metric which draws on accounting results to demonstrate the tangible link between NPS and business performance
Reicheld calls this new metric, which measures the revenue growth generated by returning customers and their referrals, earned growth rate. Alongside this he advocates measuring the earned growth ratio, the ratio of earned growth to total growth.
What challenges does this present for real estate?
Reicheld’s article points out some of the challenges for businesses wanting to adopt this type of reporting. The challenges are even greater for our industry given its historical approach to measuring value. Some of the challenges include
Life-time value
In real estate we are very good at tracking the value of an asset but not that of a customer relationship. How many property businesses adopt customer accounting and can accurately track the costs and revenues for each customer over time? Do we know whether customers (‘tenants’) are earned through recommendation and how many, in Reichheld’s language, are bought through marketing and incentive deals.
Costs of customer acquisition
A second challenge is being able to accurately capture the cost of acquiring a customer and bringing them on-board. This could include everything from property marketing costs, legal and letting agents fees and investment in customer relationship management.
Measuring retention
Retention was never a key metric in the days of 25 year lease but in today’s market it is an essential measure of performance. The challenge for property is that we struggle with it as a metric. You’ll see various figures referred to in property company accounts but rarely is the method of calculation made clear. It’s a macho thing – the higher the number the more impressive the leadership team. What’s not clear is what has been left in and out of the calculation. Reichheld advocates the use of net revenue retention (NRR) which expresses the revenue of retained customers divided by total revenue as a percentage.
New customers
The next challenge for property is how to work out what percentage of income has come from referrals (ENC). To begin to work this out we are going to have to systematically identify the source of new customers. We’re going to have to ask them for their primary reason for renting space. In an industry that is only beginning to recognise the value of brand building, the initial scores might be very low.
Reicheld’s earned growth rate is simply the sum of net revenue retention and earned new customers (less 100).
So what is your Earned Growth Rate?
The HBR’s article is very timely for our industry as we rapidly transition from ‘bricks for life’ to ‘space as a service’. Do get in touch with us here at RealService if you’re excited to explore how earned growth rate can be applied to the real estate sector and your business.
Contact Howard Morgan at info@real-service.co.uk
