Loyalty is the core economic engine - Interview with Sara Richter and Fred Reichheld

0:00So welcome to the next edition of the PunkCX podcast. Well, today I'm really quite excited. I'm quite excited for two reasons. One, I have a returning guest. And two, I'm joined by, I'm going to say, a legend. He's probably going to be going to demur on that sort of point, but he's definitely a legend. And I'm delighted to say I'm speaking today to Sarah Richter, who is my returning guest, who is the CMO of SAP Emarsis, but also legend himself, Fred Reichelt, who is a Bain & Company fellow, the creator of the NPS system, and a New York Times bestselling author. welcome both to the podcast. I hope you're both well.

0:37And how are you doing? Well, thank you, Adrian. Good on this end. Such a pleasure to be back. And we managed to talk over each other. We did that very well. Well, that's kind of fine. Well, I'll tell you what I'm going to do. I am going to go and ask you both to introduce yourself a little bit, to tell me a little bit about yourselves and the work that you do. And I'll tell you what, I want to start with kind of yourself, kind of Sarah, because you're a returning kind of guest, if that's okay. Absolutely. Thanks, Adrienne. So, yes, so my name is Sarah Richter. I have the privilege to be the CMO for SAP Amarsis.

1:06Amarsis has been part of SAP for about five years now, and we have that privilege. And within Amarsis, we sit within the customer experience part of the organization. Amarsis itself is purpose-built for marketers. And what we care about is getting marketers to build and launch and scale AI-powered, personalized, omni-channel engagements that actually really deliver business outcomes. for brands. And that's what we spend our time doing. Perfect. Fred, sir. Fred Reicheld. I graduated from business school in the early seventies, joined Bain & Company and have been there ever since for the last 30 years or so as a Bain fellow.

1:47And I have, my whole career has been focused on loyalty of customers, the important economic impact of loyalty. In fact, I would argue the most central element in financial success of a business is earning the loyalty of customers and turning that from an idea into practical tools and metrics and processes that help executives run a business to earn the loyalty of customers as opposed to, or not necessarily opposed to, but in addition to, or support of financial metrics, which we do measure brilliantly today perfect now sarah you were on back on the podcast you were on the podcast back in the march of last year and where we talked about this the customer loyalty index now i know you have new data to talk about and i love a bit of data and a bit of research i know you do and i wanted to get into that but before we get into that i wanted to come to yourself Fred first, because I believe that you recently spoke at the SAP CX Connect event.

2:52And during your talk, you said, every interaction, whether your brand, people, or systems should deliver value that customers and partners would genuinely miss if it disappeared. And I was like, oh, okay. And what I wanted to ask you to go, can you explain what you mean when you say that? Because it's kind of quite a big thing to say and also quite a big challenge in many ways. Yeah, this is sort of a philosophy that came from Bill Bain. He said, every time you talk to a client or a customer in our case, you're either gaining share or losing share. Right. And think about every interaction, every communication, every time they think of you, you're either increasing your reputation or diminishing it.

3:37And in that sense, companies need to be very, if they want to be thought of as a worthy supplier that you're proud to be associated with, for heaven's sakes, keep track of those interactions and whether you're gaining share or losing share. Right. And I guess that feels like a very human sort of like way of thinking about it. So from almost a relationship perspective, right? So it's a bit like - Outrageous. I know. Who knew? that kind of business is human. Yeah, I think the philosophy behind loyalty and I think behind great marketing is that every time you touch a customer, the objective should be to enrich their life as efficiently as possible, but every touch, because enriching a customer's life turns them into an asset who comes back for more and refers their friends.

4:32That's what really drives financial prosperity and profitable growth. Yeah. But it's not clear the way most companies keep track and keep score with accounting metrics today. And you also have been quoted as saying that, particularly, I guess, the originator of one of the originators of the NPS. Oh no, the originator. The originator. There's a lot of, every success has many fathers. This one has one. I apologize profusely. You're the originator of the MPS system, but you also said it's a highly reliable indicator of an organization's ability to grow. But here's the trick. You also said that organizations that win treat it as a management system rather than a one-off score.

5:18And I think we've seen a lot of people score chasing and stuff. And you're actually seeing it's more of a systemic system sort of thing. and can you explain to me what treating it like a management system kind of looks like just to kind of clarify that because we see a lot of score chasing around where people quoting nps numbers and things rather than actually thinking about the dynamics that are involved with that with those scores right and i'd say you know my last book winning on purpose i make the argument that you know this score is turning into a less and less reliable tool because because when you fixate on a survey-based score and there are sampling dynamics.

5:54And for heaven's sakes, what are response rates on surveys today? 1%, one-tenth of 1 %? It's sort of an absurd idea that you can have a reliable metric based on surveys. So the same idea is behind that promoter system that if your goal is to turn customers, to enrich their lives and treat them so they'll come back for more and refer their friends, that's what you should measure. How many of your customers are coming back for more and how many are referring their friends? And with that as the primary objective, you build a system around what's the root cause for them coming back or not, referring or not, what are the economic implications, how do we hold people accountable and give them appropriate objectives?

6:41So it's a strategy of how many customers are we going to touch this year and of that, what's our yield rate of turning them into true promoters, not just score nines and tens. That doesn't work anymore. People who come back and especially refer their friends. Perfect. I mean, as you said, Brad, this is all about building better, stronger, loyal, and more valuable relationships with customers and fostering loyalty with them. Now, Sarah, I want to circle back with you and then dig into the data, particularly this new customer loyalty index data. So what's your data telling us about the state of loyalty right now?

7:24It's really interesting. And it has definitely changed since we last talked about it, Adrienne, which makes for a much more interesting conversation, I think. But it is something that I think brands need to think about. Loyalty is changing. And even brands that we think of as iconic, that have been around for a long time, that would seem to be very stable, are actually potentially seeing loyalty slip through their fingers. The bonds that consumers are forming with brands seem to be more fragile, more fleeting. And I think touching on some of the things that Fred's talked about, more complex to earn.

7:59And as a result, what we saw in the data was true loyalty, that nirvana to which all marketers and brands aspire. For the first time in the five years that we have been looking at it in the UK, it stalled. So that is disturbing if you are a brand. I think for any marketer, any business person, and again, to Fred's point, I wholeheartedly agree. It's not just about marketers. Businesses need to think about loyalty. Why is that happening? and how are consumers changing and how do brands need to change and not hearken back to the things that they have continued to do that are perhaps not working as well as they used to.

8:43So true loyalty has kind of like stole, I mean, I know that their research from last year has identified like five different types of loyalty. Are we seeing that there's still five different kind of types or it's kind of like fragmenting even more? So it's fragmenting. And I think that's what's interesting. We had five and we had consistently had five for a lot of time doing this and really thinking about the data. And this year we really saw the emergence of a sixth type. And that sixth type is called trend loyalty. And we're seeing it mainly driven by Gen Z. And what is trend loyalty about? Well, it's about things like 43%, which is a lot really of Gen Z shoppers in the UK bought something just because it was trending on social media somewhere.

9:34Just cut. 64 % are telling us that they care about the products. They're loyal to the actual product. Right. That loyalty does not necessarily extend to the brand. Okay. And then there's an emotional piece. 45%, and I really find this fascinating, are more likely to trust a product if it goes viral. Well, think about why things go viral and how that is now impacting purchasing and decision making. So it's really, this is really something I think all of us have to start to get our heads around, around the way a different set of consumers are thinking about the products or thinking about the brands or thinking about how they're engaging.

10:17So it's not that loyalty is vanished on us. It's still there. But it is evolving. It's evolving really quickly. And all of us need to learn to move at the speed of the culture that it's evolving with. Right. I mean, that's fascinating. It feels like it becomes this kind of, there's an obvious kind of conclusion from that. It's like chase virality, which that might be a hostage to fortune. and there might be this because it feels like it's a slightly ephemeral sort of like thing if that's the right kind of like words can find it so it's like it's it feels like that people need to kind of lean into it to almost like better understand their customers and that might provide some of the clues i agree i think but i think you also the trick i think is to figure out how can you be present in that viral moment if you like But then how in the point of creating that engagement of making things better for the customer, how do you then use that as the stepping stone to creating loyalty that goes beyond that viral moment?

11:21So what have you learned from this customer in that interaction? What are you going to do next? On what channel? How are you going to engage that's going to move them from just a single transactional interaction to something that actually has a longer term lifecycle, a customer journey, true loyalty? And how do you keep working on that? So how do you understand that? I think that's where it gets interesting and challenging for brands, but also you can be very creative, right, as a marketer in that direction. Yeah. Now, I also got to know that I noticed rather that when people talk about loyalty, they talk a lot about B2C kind of loyalty.

12:02It's all very much consumer driven. But I also noticed that your loyalty kind of like work actually delved into the B2B sort of like space. And the B2B space is not necessarily talked about as much as it should, particularly kind of given the kind of amount of value it contributes to economies generally. And so what are you seeing in terms of the B2B space and loyalty? What's the kind of things, what are the dynamics kind of there? What's the research telling us? So it was fascinating. So this is the first year that we've done a business loyalty index as well as a consumer loyalty index. So it was fascinating to see the data and actually compare the two.

12:37Where did they intersect? Where did they not? And not as different as you might imagine that they would be. Okay. We really felt and saw that that emotional logic that I was just talking about in terms of Gen Z shopper on TikTok that's being driven by trend is actually shaping enterprise procurement, which is really quite remarkable, I think. So our B2B loyal types, we have six types. And I would encourage anybody to, if you're interested, to dive into the report and understand a little bit more about what each one is. But the adaptive loyalty type, which is about 24 % of the audience, mirrors trend loyalty.

13:14And you see UK buyers rewarding suppliers that innovate and stay relevant very much the way that a consumer is rewarding a brand that innovates and stays relevant from a consumer side. And I think really it shouldn't be that big a surprise to us because everybody who is a buyer in a B2B world, I am. Well, we're also a consumer in our normal everyday life. So it really shouldn't be that big a surprise that the expectations and demands that we have for brands when we're acting as a consumer for ourselves. Why is it a surprise that those are not the same as we are when we're operating in business today?

13:53so i think there's this real convergence of the two and it's no brands can no longer think oh what you know i need to do this on the consumer side and not worry about the b2b side that's just not true anymore um thank you for that i mean that's fascinating it's like bring yourself to work right it feels like exactly so let's talk about the elephant in the room right which seems to be the elephant in every room right now which is the impact of artificial intelligence and all the different applications and and new software and things that are out there what impact is it having on on on loyalty because it feels like sometimes that the the distance between kind of brands and and consumers or customers in a broader sense is possibly widening given some of the the tools that are being used kind of like now i think as as with anything it's how you use something and how you think about it.

14:51And I think AI can be an enormous help and enabler in loyalty. It does not replace human. I want to be very clear about that. In no way does it replace a human interaction. But what AI can help you do is scale. It can help you scale data, which means you're scaling understanding. And if you can do that, then you're empowering personalization at scale across your different channels to your different audiences, all of these different places as one-to-one as possible. And that ability to be real-time and to really use that volume of data, that's something that you can only really do with AI. You just can't move fast enough to keep up if you're trying to do it purely from a human base.

15:37So from my perspective, it's using AI to help you scale, to help you automate so that you understand your customer even better from every moment and you can act absolutely in that moment and that's what's allowing you to to not just have these disconnected one single experiences but actually create an overall relationship and overall you know life cycle with your customer now i want to fredo if i may i'd like to bring you back into the conversation and show you this because this is from back in 2001 you wrote this book called loyalty rules and in the book you set out six principles for building sustainable loyalty with stakeholders now i'll just go quickly it says play play to win win be picky keep it simple reward the right results listen hard talk straight preach what you practice so those are the six principles I wanted to ask you for your perspective on like in this AI powered world, as Sarah has just been discussing, you know, do those principles still apply or have they kind of changed?

16:44I'm pretty amazed how relevant and timely the stuff I wrote 20 and 30 years ago remains. this because i think you know i did a lot of things wrong in my career but one thing i got right is the core of success is treating another human being in a way that enriches their life so impressively that they had they want to share that with a friend because they think that will make their friend's life better it's it's the highest road there is in creating value and and and that's how the the businesses who grow the fastest to get the that stock price appreciation That's the core engine that's driving it.

17:24So take that one principle, reward the right results. Most companies get this wrong. As something that Sarah said in the trend, viral spread, which has emotion in it, is what is driving these really most impressive growth stories. But viral is one word. I like to use word of mouth, which is referrals. It's friends telling other friends, not because they want to make more money for the company, but because they think the friend's life will be better off. And that's the thing that drives prosperity. My next Harvard Business Review article will share some pretty shocking data I shared with the SAP audience earlier.

18:10year, when you look at every new customer cohort coming in each year, about 20 % are referred by friends for an average company. Now, great companies, it's 80, 90, 100%. But we look at the 20 % of customers who are referred, they generate 70 or 80 % of the profits that come from that new customer cohort. So it's 20 % of the customers driving most of the profitable growth. So isn't that a result you'd like to reward? Absolutely. Of course. But how many companies even keep track of referred customers versus all other channels, what the true economics are through time? And instead, they are doing what's easy to do today, which is, well, I'll pay my sales force a commission on new revenue.

19:01Irrespective of whether that is ephemeral revenue that never comes back to pay for the investment or the commission. And so we've got a lot of, and I think it's true for a lot of marketers, we get paid for things that we know how to measure easily. And right now, companies don't keep track of this. And so probably the most important, powerful business force, treating people right, enriching their life, turning them into assets is invisible. And the reward system is exacerbating the problem because we're paying for revenues, not generating profit streams. And very few companies are yet recognizing the power of this force of bringing in customers, not with your sales force, but by inspiring your existing customers to become your sales force.

19:56Because they're not only cheaper. They bring in the right new customers who have a higher likelihood to be happy and turn into true promoters themselves. Indeed. I mean, it's the, you know, the referrals based on their own sort of like subconscious pre-qualification in many, in many respects. So at the end of every year, I also, I produce this kind of like predictions piece, which is like a curated predictions piece. And this year it turned into a gargantuan affair where I got 777 different predictions from nearly 400 different people. Some are sure to be right. Yeah, completely. It was a big old dartboard and I chucked a dart at it.

20:35It's going to work. Anyway, I was able to distill them down into about 60 or so different predictions over about, I think it's about 15 different sort of themes. And one of the themes that came out was, well, one of the predictions that came out was that it suggested that brands were moving away from more points-based loyalty programs. And they were moving towards more of a whole business approach to loyalty because they just see the bottom falling out of some of this sort of like stuff. And that feels like kind of what you're advocating kind of like, Fred, is taking a bit more of a whole system approach to this.

21:08But I wanted to ask you, Sarah, about does the research support that sort of shift? 100 % I think we would absolutely say the one of the worst mistakes you can make is to think of loyalty as a program loyalty is not a program it has to be central to your business that's the fundamentals of it and the things that influence it are so much of what Fred has already chatted about its relevance and values and emotion and trust is there an opportunity to have something where there's points as part of your interactions I wouldn't say that that is that is necessarily not something you want to do, but it shouldn't be the whole.

21:45You need to really think about brand experiences. And when we look at the data, UK consumers are telling us that it's memorable experiences, personalized engagements, things that are unique. That's what they remember. And that's what positively impacts their loyalty. Not the fact that they got 25 points yesterday when they bought something. I mean, Fred, are you saying the same sort of thing, that sort of shift that people are going, well, loyalty programs, they served as well for a while, but now we're going like, we actually see this is, we need to play a bigger game. I think most loyalty programs are pretty tired and a lousy investment.

22:26The best ones are going to be used as platforms for understanding who is referring whom and why and using that to inform the business about where to invest in CX and where to wow customers in a way that is profitable and sustainable. And for heaven's sakes, you've got this rewards program. What's rewarding the right result? Well, you want to know which customers have been so delighted that they refer a friend. I don't mind recognizing or giving points to someone who refers a friend as long as it's modest. I like it even more if that referring customer actually gives the value to that referred friend because they think this should be a gift try this you will life will be better so i think that's the jujitsu but i'm repeating myself but my goodness there's a lot of money wasted on so-called loyalty programs they have nothing to do with loyalty it's just cheap promotional gimmickry and thank you for that so i also wanted to ask you if i may about net in sort of in net promoter 3.0 you introduced this idea of an earned growth rate which i do believe is something that you've worked with connie culture on who's at zurich and connie talks glowingly about what they've done you know over there with that and i wanted to ask you can you tell me about this because it sounds like a really interesting and powerful way of tracking how much light loyalty is driving growth.

24:05That sort of thing that's always been, for many brands, has been slightly hard to pin down, as it were. So can you give us a bit of an insight into how that light works? Yeah. Connie is one of my favorite marketing execs forever. When she was at Lego, now at Zurich, she's terrific. Because she gets this notion that your job as a human is to make others' lives better. And that's how you make your own life better. So earned growth is just my next step in the net promoter system evolution of, you know, we can't trust survey scores and that it's just, you know, it's not working. I don't fill out surveys, do you?

24:51It's a waste of my time. It's abusive. But what can you track that lets you know if you've enriched a life and earned growth? Well, do they come back for more and do they refer their friends? And earned growth is just simply measuring those things as if they were important. And Connie at Zurich and other pioneering companies are shifting their net promoter philosophy and managing it through measuring those real things that have cash flow consequences and can be used to benefit, to do cost-benefit analysis of enhancements and innovations to continue to wow customers. And I think earned growth is the right object.

25:36It's the North Star, far better North Star than today's profits or today's costs. And it feels like it's more... because one of the so one of the things that i think that's played the sort of a service and experience sort of space is the ability to to demonstrate roi from many of these investments and it feels like you're getting with like an earned growth rate approach you're getting more very much much much closer to like like a causal analysis going like we do this we do this we get that rather than going oh if our numbers go like this then there's a correlative kind of like there's a correlation between that and increased revenue.

26:14Yeah, and companies don't measure it today. When I started out in the earliest part of my career, I started embarrassing CEOs by saying, gee, what's your retention rate of customers? And they don't know. They didn't know back then. And so we went through the math of a five-point change in retention will swing the profits from a customer by up to 100%, five-point. So you just get the math and the economics in front of them. that same thing is going on today when you say, what percentage of your new customers are referred? Because earn growth is back for more and bring your friends, but it turns out that bring your friends is the purest signal.

26:51And it's today. People only have so much need for your product. You can only cram so much down their throat. On the other hand, if you delight them and they tell a friend and that friend tells two friends and two friends, that's where you get this explosive growth. And that's the truest signal that I think is got to be front and center for great brands. Think about what defines your brand. Not your advertising. Not what you want to be. It's your core customers who are out there talking to their friends. And if you think of your referring customers as the magnetic core that needs to be nurtured and strengthened so that they attract the right new customers who will likely become part of that core and strengthen it, that's the way to run a business.

27:41and most companies don't have the systems in place to measure and monitor that yet but i think they will just like you know basketball and hockey teams didn't have advanced analytics and now they do they have goals for goals against while you're on the ice or while you're on the floor this is what the leading businesses are going to be doing as they start to see oh i can't reach my growth targets without getting more of my customers to be referring and taking the place of my expensive sales force. How am I going to use AI? I'm going to use AI to figure out who's referring me and what they're saying about me so I know what's special and what my magnetic core truly is and so I can nurture it.

28:24Perfect. That's all I have to my list of questions I had that I've got to the end of it i wanted to ask because it's a really big subject a really interesting subject and i completely agree that you know that loyalty is this underappreciated sort of like area of potential and growth i always sort of like gravity before newton yeah right it's i always kind of like there's a piece of research that was done it's like old from a a software vendor i think it was click fox kind of it was over like 13 years ago but i loved some of the findings that that they came out with where they said that you know in their research they found that 90 of all loyalty with customers driven by what happens with two points of a journey kind of one is what happens around the buying experience and then the second is what happens when something goes wrong yeah and and if you think about that and i just thought i love that because it's so aligned with kind of human behavior i when we make decisions we want to feel good about the decisions that we're making we want to feel right and comfortable and secure in that but we also realize that sometimes things go wrong and because we have a fear of uncertainty and disappointment and failure and all these things this is because of threat response we won't be able to save us in this quick and easy and efficient manner as possible.

29:57And then you end up with this fused idea of loyalties about this whole journey approach to things. Well, I think Sarah's tools at Amarsis are so promising because they can start to bring that reality, that human reality into the database and the measurement and the manageable, hold people accountable for results. And people think, oh, AI is going to change everything. Sarah's point that B2B loyalty works the same way. In fact, I think it's stronger because you know the players. People switch firms and they go to vendors and they meet at conferences. It's not advertising baloney and paying for Google words and all of this bot growth.

30:43It's real results. And so how do you deliver real results and then let the right digital tools spread that and clarify it and learn from it so i i do think hmm i you know i i i really do think gravity just like coperticus got in a lot of trouble with the church when he took the courageous you know gee you know i think it might be we're going around the sun it's not an earth-centric thing yeah right now the world still believes it's a profit-centered thing yeah and it's just not. That's a financial fiction that accountants dreamed up. It's a useful tool, but it's not the center of the universe.