10 rules to survive an economic downturn, the new SMARTER Goals & what is Net Promoter System 3.0?
28 May 2022 Newsletter
“Leadership is not about forcing your will on others.. It’s about mastering the art of letting go.” – Phil Jackson
Hope you’re Thriving!
It’s been a different week this week, spending a couple of days recording the audio version of my new book about onboarding and sending the completed manuscript to the designer. It sure is good to complete key milestones for the book!
Net Promoter System 3.0
Since its introduction, in 2003, the Net Promoter System, which measures how consistently brands turn customers into advocates, has become the predominant customer success framework. But as its popularity grew, NPS started to be gamed and misused in ways that hurt its credibility. For example, unaudited, self-reported Net Promoter Scores undermined the usefulness of NPS.
Over time its creator, Fred Reichheld, realised that the only way to correct this problem was to introduce a hard, complementary metric that drew on accounting results. In the article below, he and two colleagues from Bain introduce that metric: the earned growth rate, which captures the revenue growth generated by returning customers and their referrals.
To calculate their earned growth rates, firms must have systems that gather data on each customer’s costs and revenues over time and ask all new customers why they came on board. If the reason is a referral or recommendation, a customer is “earned”; if it’s advertising, a promotional deal, or a persuasive salesperson, the customer is “bought.”
Earned growth rates reveal the real-world impact of customer loyalty. Moreover, because they’re auditable, they can help firms validate investments in customer service and convince investors of their businesses’ underlying strengths.
Read the article here Net Promoter 3.0
You can also check out this week’s podcast, where Kevin and I discuss the new NPS 3.0 – more on that below.
We’ve all heard of SMART goals, but I hadn’t heard of SMARTER goals until recently. The SMARTER concept is from a book by Michael Hyatt called Your Best Year Ever: A 5-Step Plan for Achieving Your Most Important Goals.
SMARTER is an acronym for:
Specific – Your goal must include a specific outcome. Rather than read more, it should say read two books or read this particular book.
Measurable – Your goal must include a number or percentage.
Actionable – Start your goal with a word that represents completion. For example, “Complete”, “Have”, or “Be.”
Risky – Maximise your potential by setting risky, challenging goals.
Time-keyed & Triggered – After establishing a goal deadline, establish a reliable trigger, or habit, to ensure you take consistent action. For example, I will read one book per month by reading for one hour per evening.
Exciting – It’s important to remember why you were excited about your goal in the first place. Before starting your goal, write down at least two meaningful reasons why you’re excited to accomplish that goal.
Relevant (or reality check) – The goal must be relevant to your current situation.
10 rules to survive an economic downturn
This week I came across a letter from Y Combinator, the Silicon Valley Venture Capital firm, entitled “Economic Downturn.” In it, they list the ten things to consider for companies they invest in, during an economic downturn, based on the current state of the tech markets.
Here’s an excerpt from the letter:
Greetings YC Founders,
During this week, we’ve done office hours with a large number of YC companies. They reached out to ask whether they should change their plans around spending, runway, hiring, and funding rounds based on the current state of public markets. We’ve told them that economic downturns often become huge opportunities for the founders who quickly change their mindset, plan ahead, and make sure their company survives.
Here are some thoughts to consider when making your plans:
- No one can predict how bad the economy will get, but things don’t look good.
- The safe move is to plan for the worst. If the current situation is as bad as the last two economic downturns, the best way to prepare is to cut costs and extend your runway within the next 30 days. Your goal should be to get to Default Alive Default Alive or Default Dead?.
- If you don’t have the runway to reach default alive and your existing investors or new investors are willing to give you more money right now (even on the same terms as your last round), you should strongly consider taking it.
- Regardless of your ability to fundraise, it’s your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.
- Understand that the poor public market performance of tech companies significantly impacts VC investing. VCs will have a much harder time raising money, and their LPs will expect more investment discipline.
As a result, during economic downturns, even the top tier VC funds with a lot of money slow down their deployment of capital (lesser funds often stop investing or die). This causes less competition between funds for deals which results in lower valuations, lower round sizes, and many fewer deals completed. In these situations, investors also reserve more capital to backstop their best-performing companies, which further reduces the number of new financings. This slowdown will disproportionately impact international companies, asset heavy companies, low margin companies, hard-tech, and other companies with high burn and a long time to revenue. Note that the numbers of meetings investors take don’t decrease in proportion to the reduction in total investment. It’s easy to be fooled into thinking a fund is actively investing when it is not.
- For those of you who have started your company within the last five years, question what you believe to be the normal fundraising environment. Your fundraising experience was most likely not normal, and future fundraises will be much more difficult.
- If you are post-Series A and pre-product market fit, don’t expect another round to happen at all until you have obviously hit product market fit. If you are pre-series A, the Series A Milestones we publish here might even turn out to be a bit too low.
- If your plan is to raise money in the next 6-12 months, you might be raising at the peak of the downturn.
- Remember that your chances of success are extremely low even if your company is doing well. We recommend you change your plan. Remember that many of your competitors will not plan well, maintain high burn, and only figure out they are screwed when they try to raise their next round. You can often pick up significant market share in an economic downturn by just staying alive.
- For more thoughts, watch this video we’ve created: Save Your Startup during an Economic Downturn
And that 35-minute video, with the link at point number 10, is brilliant.
While focused on startups, it has relevant items for every leader, especially if there’s a chance an economic downturn might impact you.
This week on The Growth Whisperers podcast
What is NPS 3? How can you bring it to life in your company?
What is NPS 3? Since its introduction, in 2003, the Net Promoter System, which measures how consistently brands turn customers into advocates, has become the predominant customer success framework. But as its popularity grew, NPS started to be gamed and misused in ways that hurt its credibility. Unaudited, self-reported Net Promoter Scores undermined the usefulness of NPS.
In order to address this problem, Fred Reichheld, the NPS founder has introduced a hard metric, drawn from accounting results, known as “earned growth rate” that captures the revenue growth generated by returning customers and their referrals.
In this episode we discuss;
- The problem with NPS
- How NPS3 works
- How to calculate your earned growth rate
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