NPS as Moral Compass

This positioning proved unnecessarily narrow. Leaders such as Walt Bettinger and Lanham Napier valued Net Promoter not only because it helps an organization remain centered on its primary purpose—enriching customer lives—but also because it serves as a practical moral compass for employees. Maybe this customer-centric business movement would have advanced faster if I had taken a bolder stand, focusing less on building financial net worth and more on the more fundamentally important goal of building human net worth.

Recall that Martin Luther King Jr. quote: “Everybody can be great, because everybody can serve.” By that standard, meaningful service to others surely should be the true measure of greatness and our ultimate goal. But because “meaningful service to others” has traditionally been devilishly difficult to measure, we have typically defaulted to more easily measured financial metrics for gauging greatness.

This is true on the individual level as well as the corporate level. Let’s start with individuals. The annual Forbes list of billionaires for too long has served as the compendium of our society’s exemplars of great success. But are these wealthy magnates really our most worthy role models? I would say “no.” Financial net worth provides a wholly untrustworthy measure of personal greatness. Consider the historical examples of people such as Abraham Lincoln, Clara Barton, Mahatma Gandhi, Nelson Mandela, Mother Teresa, Martin Luther King Jr., Jonas Salk, and Albert Einstein. These are individuals who had unexceptional financial net worth and yet created enormous human net worth.

Conversely and sadly, too many people built great financial net worth by abusing their customers, employees, and partners. I’m thinking, to name a random few, of Chainsaw Al Dunlap, Jeffrey Epstein, Harvey Weinstein, Theranos founder Elizabeth Holmes, and the Sackler family, whose Purdue Pharma empire shamelessly fostered opioid addictions and deaths; the list of bullies and cheats goes on and on. They are all black-belt masters of value extraction rather than value creation. This is an important point. Relying on profits as our gauge of greatness is often misleading, because profits quantify value extracted from customers and employees rather than value created for them. If our primary goal is to create customer Promoters, then profits cannot serve as our North Star.

The pursuit of financial success as the ultimate corporate objective often leads not to greatness but instead to abusive and manipulative practices that diminish the dignity and well-being of customers and employees. Consider the legal but morally questionable practices of traditional financial capitalist companies that make profit their overriding purpose. You could make your own list: car rental firms charging punitive late fees, payday lenders preying on financially vulnerable populations, brokers pushing complex and risky investments to retirees, some hospitals tripling their prices for uninsured patients, and many health clubs selling hard-to-cancel subscriptions to customers they know won’t use them.

Redefining Greatness

Most of the business literature on “excellence” or “greatness” treats financial net worth as the one true goal—the alpha and omega of capitalism. Certainly the most celebrated contemporary analysis of corporate greatness is Good to Great by Jim Collins.² That book has sold more than five million copies and remains a staple of the executive bookshelf. Collins identified his “great” companies based purely on financial criteria. His eleven exemplars of business greatness, listed in figure 2-1, were chosen without regard to the firm’s primary purpose or human net worth created, but simply through the lens of financial capitalism. These firms generated superior shareholder returns after previous periods of average performance.

FIGURE 2-1

Exemplar companies

But when we examine their performance in the years following the book’s publication, these companies were far from stellar. Why this dramatic reversal of fortunes? The answer is complicated and varies from company to company. Collins himself studied that decline and published his findings in a subsequent book; he blamed the downfall of those companies on hubris and the mentality of buying growth at any cost.³ But I think there is more to it. Those firms (like most companies today) gauged their success using the metrics of financial capitalism—primarily profits. When profits become purpose, it becomes too easy for large and powerful firms to boost their financial performance by shortchanging customers and employees. This is value extraction, not value creation, and since value extraction doesn’t show up in audited financial statements, this kind of abuse can go undetected for months or even years, at least by the investor community.

Customers and employees notice right away, but it may take them a while to react. Once customers have integrated a provider into their lives—for example, by putting all their billing information into a bank’s automated bill-pay solution—they are quite vulnerable to value extraction by that provider. Meanwhile, employees who have invested many years with one firm are likely to find that switching to a new job entails substantial costs, and these too may be viewed by profit-driven managers as exploitable exit barriers.

Actually, I’m a big fan of Jim Collins’s work and remember agreeing with most of what he wrote in Good to Great. Nevertheless, the simple fact is that the Good to Great companies were not resilient and started to slide shortly after they were anointed. Bain teams examined the total shareholder return (TSR) of these firms in the decade following that book’s publication. We didn’t take the lazy man’s benchmark—the readily available S&P 500—because that index rotates companies on and off its list, is cap-weighted, and ignores dividends. To create a more accurate standard, we gathered data on share-price appreciation plus dividends paid for all US public companies.⁴ We then performed the same analysis for the NPS leader companies from The Ultimate Question 2.0 for the decade after that book’s publication. The lists of company exemplars used in each book are displayed in figure 2-1.

In figure 2-2, we compare the TSR performance of the Good to Great companies versus the TSR of the NPS leaders identified in The Ultimate Question 2.0. In each case, we quantified TSR for each group relative to the median stock market return in the decade following each book’s publication.

FIGURE 2-2

Total shareholder return (TSR) vs. US median

Source: CapIQ

Note: Cumulative TSR represents total return assuming investment from 1/1/2001–12/31/2010 for GTG companies and 1/1/2011–12/31/2020 for NPS Leaders companies; Altria and Philip Morris: upon split on 4/28/2008, assumed reinvestment proportional to the deal terms; Gillette: P&G acquired Gillette in 2005 for $57B—TSR reflects reinvestment into new P&G, in 2019 P&G wrote off $8B of Gillette value; Facebook: TSR since IPO for the period 5/18/2012–12/31/2020; MetroPCS: assumes TSR for MetroPCS through TMUS acquisition in 4/30/2013 and re-evaluates TMUS TSR since IPO for period 5/1/2013–12/31/2020; Public US firms represent ~1,400 and ~1,600 publicly traded companies in US with revenue >$500M listed as of the start of each respective time period.

As you can see, the Good to Great companies delivered only 40 percent of the median market performance, while The Ultimate Question 2.0 NPS exemplars delivered 510 percent of the median return. In other words, the firms that appeared great through the lens of financial capitalism made their investors very unhappy over the decade following their anointment, while investors in companies that looked great through the lens of customer capitalism delighted their investors in the decade after their NPS superiority was revealed.

Meanwhile, let’s not forget the six NPS leaders that are private, subsidiaries, or mutually owned and for which we can’t use the stock market as a gauge. These firms are sending signals of equally impressive performance (and maybe even better). For example, Chick-fil-A has now expanded to 2,500 stores to become the third-largest US restaurant chain, Vanguard has mushroomed to $7 trillion in assets under management, and Trader Joe’s is so popular that, at least at my local store, there is usually a line of cars waiting to get into the parking lot. There is not a single clunker among the NPS leaders.

In figures 2-3 and 2-4, we break out the performance of our two collections into the individual firms. And as you can see, only three firms of the eleven in the Good to Great collection managed to beat the stock market median. The reason I chose to benchmark medians was to avoid overweighting the disastrous performances of Circuit City (bankrupt) and Fannie Mae (essentially bankrupt, placed in government receivership).⁵ Several other Good to Great exemplars got slapped with enormous government fines for mistreating their customers. Two or three of the firms are indeed excellent, but overall, has this turned out to be a collection of admirable and resilient companies? I know where I come down.

FIGURE 2-3

Eight of the eleven Good to Great companies lagged the US median (1/1/2001–12/31/2010)

Source: CapIQ

Note: Cumulative TSR represents total return assuming investment from 1/1/2001–12/31/2010; all US firms represent all publicly traded companies with revenue >$500M as of 1/1/2001 (N = 1407).

*Altria and Philip Morris: upon split on 4/28/2008 assumed reinvestment proportional to the deal terms.

**Gillette: P&G acquired Gillette in 2005 for $57B—TSR reflects reinvestment into new P&G; in 2019 P&G wrote off $8B of Gillette value.

FIGURE 2-4

All eleven NPS leaders beat the US median (1/1/2011–12/31/2020)

Source: CapIQ, T-Mobile annual reports

Note: Cumulative TSR represents total return assuming investment from 1/1/2011–12/31/2020; all US firms represent publicly traded companies with revenue >$500M as of 1/1/2011 (N = 1594).

*Facebook: TSR since IPO for the period 5/18/2012–12/31/2020.

**MetroPCS: assumes TSR for MetroPCS through TMUS acquisition in 4/30/2013 and re-evaluates TMUS TSR since IPO for period 5/1/2013–12/31/2020.

***Google parent company Alphabet Inc. used.

Contrast the performance of The Ultimate Question 2.0 collection. All eleven firms beat the stock market median over the decade following the book’s publication. Of course, everything is clear in hindsight, but hindsight couldn’t help us when we selected the list of NPS leaders in 2010. All we knew was that these firms had so loved their customers that they transformed into loyal promoters—which undergirded these firms’ superior Net Promoter Scores. And this single insight accurately foreshadowed their future performance.

Lessons Learned

Again, Good to Great contained many insights. Jim Collins’s particular genius enabled him to draw useful lessons even from his soon-to-be-defrocked exemplars of greatness. Many of these lessons are indelibly imprinted in today’s common business wisdom and MBA curricula, and rightfully so. Get the right people on the bus, focus where you can be the best in the world, make that strategic flywheel spin, pursue Big Hairy Audacious Goals, become a level 5 leader, and so on—all excellent ideas. But even Collins’s insightful analysis and vivid articulation of his findings couldn’t help his exemplars extend their successful runs. Their formula proved fragile and failed the test of resilience.

My takeaway will be familiar to you: A company can’t be great without embracing a great purpose. In this way, I believe that the Net Promoter framework complements the lessons from Good to Great—and perhaps fills in some weak spots. Good to Great employed a financial capitalist mindset, defining greatness in terms of financial results. I recommend measuring greatness against the standard of a winning purpose. While Collins emphasized that leaders must concentrate where they have passion, Net Promoter posits that the primary purpose worthy of passion—and the one that consistently wins—centers on enriching customer lives. One important insight that Good to Great overlooked is that Collins’s famous flywheel won’t keep spinning unless it is powered by loyalty economics. You will see evidence throughout this book supporting this perspective.

I am sadly confident that some of the NPS leaders we identified in 2010 will not maintain their lofty perches. Competitors will innovate superior customer-enriching solutions and displace them. But we—and they—will see this transition coming as their relative NPS results weaken. By focusing on this gauge of greatness, by measuring their success based on their relative Net Promoter Score, I expect that some firms will be able to reverse their decline before it is too late. Investors who are wise enough to monitor NPS will also be able to anticipate these declines and take action. Amazon, for example, regularly benchmarks its NPS versus competitors in every category where they compete—and always includes new entrants. Founder and chairman Jeff Bezos constantly reminds his team never to ignore the small and apparently insignificant players. Why? In part because Barnes & Noble once ignored Amazon as a small, insignificant player—and look what happened.

F.R.E.D.’s Purposeful Theory of Investing

Based on my theory that the best growth engines are fueled by customer loyalty, I have been investing in NPS leaders for many years. These companies live by the Credo of F.R.E.D. (Foster Recommendation, Eliminate Detraction). To showcase the results of this investment strategy, I created the F.R.E.D. Stock Index (FREDSI), which tracks TSR for the portfolio of companies that achieve the highest NPS in their industry sector—in other words, the customer-love winners. I began the index with the eleven NPS leaders identified in the research for The Ultimate Question 2.0, listed in figure 2-1.⁷

As Bain research probed additional industries and discovered clear NPS leaders, I added those firms to the index on January 1 of the subsequent year. Texas Roadhouse joined the index in 2010, and both Discover Financial and FirstService were added in 2015. In 2019, Bain performed an NPS X-ray across the auto industry and found that Tesla had built nearly a ten-point lead versus runner-up Subaru. In pet supplies, Chewy outpaced the competition by twenty-eight points. So, we added both firms in January 2020. I plan to drop firms from the index if their NPS slips to a distant runner-up status, but that has yet to happen.

We rebalance the portfolio each January to give equal weighting to each company so the index won’t be dominated by meteoric success stories such as Amazon and Apple. In figure 2-5, you can see why I’m so confident that putting customers first does not come at the expense of investors.

FIGURE 2-5

FREDSI beats the stock market

Source: CapIQ

Note: FREDSI covers all NPS Leader companies for the period 1/1/2011–12/31/2020; in addition, FREDSI also includes Texas Roadhouse (1/1/2011–12/31/2020), Discover and FirstService (1/1/2015–12/31/2020), and Tesla and Chewy (1/1/2020–12/31/2020). FREDSI is calculated as the equal-weighted average cumulative return for each year.

The FREDSI consistently beat the stock market (using Vanguard’s Total Stock Index as its benchmark).⁸ Its annual returns exceeded 26 percent, which with compounding nearly tripled the stock market’s cumulative TSR over the decade. To calibrate how remarkable the FREDSI’s performance has been, consider this: the very best return across the universe of mutual funds and exchange traded funds tracked by Morningstar barely reached 19 percent over the decade, seven points lower than the FREDSI. I asked leading private equity expert Steven Kaplan, professor at the University of Chicago’s business school, how the FREDSI compared to funds in that sector. He confirmed that my 26 percent annual return outperformed the vast majority of private equity funds over that decade while avoiding the risky leverage and illiquidity inherent in those funds.⁹

Remember, we didn’t build this index after the TSR results were already clear, through a backward-looking portfolio construction. We spotted customer-love winners up front based on their industry-leading NPS. The extraordinary performance of the FREDSI indicates that investors should welcome customer capitalism. You’ll see even more evidence of this in chapter 5.

Back to the Apple Store: Defining Great Leadership

Now, let’s return from the world of financial investments back into the personal world. I want to share one last story before we move on to chapter 3, which focuses on interacting with customers. Let’s pick up where I left off, after my interview with Alice in the basement of the Boston Apple Store. I went back upstairs to the sales floor, where a team member interview was being videotaped for a training video. The interviewee, whom I’ll call Janine, was asked to explain what made her happy working at Apple.

“I know it sounds pretty lame,” Janine replied. “Enriching customer lives with technology products. But that’s what we do here.” She then told a story about an elderly customer whom she taught how to build an online store so the customer could display her artwork and process transactions at local art shows. That customer, obviously overwhelmed by all the confusing new technologies that seemed to be second nature to young people such as Janine, began her training session at the Apple Store. But the two of them—Janine and the artist—stuck with it. And in the weeks and months after her coaching session, that customer not only found it possible to earn a living through her art but also became the go-to expert among her artist colleagues—a resource who was sought out by young and old alike to help them sell their artwork online. She came back to the store to tell Janine how it had worked out, and Janine told the story to us.

I was standing behind the video camera next to the Boston store manager. As Janine wrapped up her inspiring story, the manager leaned over to me and confided, “This is what I like best about my job. When I see my team members getting recognized for enriching customers’ lives, I ask myself, what better gift could I give my team, what could possibly be more rewarding as a leader?”

That neatly sums up the revelation of this chapter and a main focus of this book: leaders and organizations are great when they help team members lead great lives. That’s the purpose that energizes everybody in the organization.