The One Number To Predict Revenue (Part 2)

The one number that has attracted a lot of attention in the past few months is R0 – the reproduction number, which tracks how contagious an infectious disease is. If it is less than 1, it means that each existing infection causes less than one new infection and hence the disease will eventually die out. An R0 greater than 1 leads to an epidemic, as we have seen with the coronavirus.

Single number performance measures are all around us. A country’s economic performance is measured by GDP (gross domestic product) growth rate. A student’s performance is assessed by a rank or a grade. A company’s business performance is captured by its PAT (profit after taxes). A fund manager’s performance and pay could be tied to the alpha – the difference compared to a benchmark index. For high-growth software companies, an interesting metric is what is called the Rule of 40 which says that the company’s revenue growth rate and its profitability margin should be at least 40.

In all cases, a whole array of numbers is distilled down to a single number that can be tracked over time and compared with others. In this context, it is instructive to look back to the Harvard Business Review article in 2003 by Frederick Reichheld which sparked the Net Promoter Score (NPS) revolution.

It took me two years of research to figure that out, research that linked survey responses with actual customer behavior—purchasing patterns and referrals—and ultimately with company growth. The results were clear yet counterintuitive. It turned out that a single survey question can, in fact, serve as a useful predictor of growth. But that question isn’t about customer satisfaction or even loyalty—at least in so many words. Rather, it’s about customers’ willingness to recommend a product or service to someone else. In fact, in most of the industries that I studied, the percentage of customers who were enthusiastic enough to refer a friend or colleague—perhaps the strongest sign of customer loyalty—correlated directly with differences in growth rates among competitors.

… By substituting a single question for the complex black box of the typical customer satisfaction survey, companies can actually put consumer survey results to use and focus employees on the task of stimulating growth.

So, what can the equivalent of NPS be to give a forward-looking view on what customers will spend with the business? What is the one number that can predict future revenue?

Tomorrow: The One Number To Predict Revenue (Part 3)

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