What is Earned Growth Rate?

Measuring how loyal customers are and determining how loyal customers affect a business’s financial growth has become increasingly important in this competitive business environment.

The traditional metrics like Net Promoter Score (NPS) have in the past provided some insights into customer satisfaction levels, but they do not provide enough information about its true monetary implications.

Out of that knowledge gap emerged the Earned Growth Rate (EGR), which is seen as a stronger metric that directly associates revenue growth with returning customers and their referrals.

What is the Earned Growth Rate (EGR)?

EGR is used to measure the real impact of customer loyalty on revenue growth from returning customers and their referrals. It is based on two inputs:

• NRR (Net Revenue Retention): Calculated as the total income from returning customers over the course of a year, divided by the revenue from the prior year, and expressed as a percentage. Shows how much money we are making out of our returning customers.
• ENC (Earned New Customers): It measures the proportion of the overall spend that originated from organic customer channels (word-of-mouth advertising, referral links) and customer referrals.

In contrast to conventional growth metrics, EGR filters out external factors such as acquisitions or accounting changes, thus providing a clearer view of a company’s organic growth. As a result, EGR serves as an important tool for evaluating a firm’s actual operational success.

Why is the Earned Growth Rate(EGR) the New Net Promoter Score(NPS)?

Although Net Promoter Score (NPS) measures how much customers are willing to refer a company or recommendation, Earned Growth Rate (EGR) assesses whether those recommendations are converted into paying clients.

It is based on real accounting data, while NPS uses super subjective survey responses. Unlike NPS figures that can be impacted by short-term offers or steep client onboarding charges, the EGR reflects real and sustained growth resulting from happy clients and their references.

For example, a start-up that uses significant discounts to attract new users would have high NPS scores owing to customers who came through what they provided at very low prices. They might leave them with such high ratings despite receiving little from them because once customers receive these discounts, they tend to discontinue usage very soon, thereby shutting down such big revenues generated during the promotion period. Therefore, it can be seen that EGR reveals whether the increase resulted from genuine referrals and returning clients, therefore providing a better outlook on future performances.

EGR also provides a more credible and tamper-resistant means to measure a company’s organic growth since it mainly consists of revenue data that has been audited and belongs to very many customers who return and also refers. The metric is effective in helping investors and analysts comprehend the actual performance of a business by concentrating on growth that is based on contented buyers instead of the simple score derived from survey responses regarding their satisfaction level.

Time is ticking on outdated metrics!

Switch to SurveySparrow and start measuring EGR to reveal your true growth potential

Signup

14-Day-Free Trial • Cancel Anytime • No Credit Card Required • Need a Demo?

Importance of Earned Growth Rate(EGR)

Real-World Impact

Earned growth rate measures actual revenue growth driven by returning customers and their referrals, rather than relying on subjective survey responses. As such, it more accurately represents a company’s true growth and customer satisfaction.

Reliable Metric

Unlike metrics that can be influenced by temporary promotions or biased survey results, EGR is based on audited financial data. This makes it harder to manipulate and provides a more trustworthy indicator of a company’s performance.

Sustainable Growth Insight

Earned growth rate highlights growth generated from genuine customer advocacy and referrals, helping to distinguish between sustainable quality growth and growth that may be driven by short-term tactics. This is crucial for understanding the long-term health of the business.

Investor and Analyst Value

Growth quality is often what an investor or analyst seeks to know about any company. In this regard, EGR helps in understanding how much of it comes from loyal customers who recommend them, thereby judging on its capacity for further success.

Improved Decision-Making

When organisations place their emphasis on earned growth, they are able to make refined choices concerning promotion plans, loyalty approaches, and general operational habits that are consistent with the real inclinations and actions of customers.

Calculate EGR: A Step-by-Step Guide

Calculating Earned Growth Return (EGR) is important because it measures a company’s organic growth accurately by concentrating on sales made by repeat customers and the people they have brought in, while leaving out things such as takeovers or mergers that could distort revenues. To calculate EGR:

External factors: This includes acquisitions, divestitures, mergers, changes in accounting principles, one-time events, currency fluctuations, and government grants or subsidies.

Example:

Let’s go over a hypothetical scenario to see how the calculation is done:

• Current Year Revenue: $6 million
• Previous Year Revenue: $5 million
• External Factors: $1 million

It can be inferred from this example that an EGR of 80% indicates sustainable advancement in relation to business functions while disregarding any contributions made by external forces.

Challenges and Proposed Solutions

There can be a few challenges in calculating EGR accurately.

Detection of External Factors

Challenges: One of the problems in EGR calculations is the increased complexity that is caused by multiple external factors. This can make EGR calculations less reliable.

Solution: Keep meticulous records for external factors so that it can be factored into the EGR calculations.

Consistency in Accounting Practices

Challenge: EGR precision may be compromised by changes in accounting practices over time. This is especially a challenge because EGR is calculated over large time frames.

Solution: Ensure accounting practices are similar throughout time, as well as normalise data for accounting changes.

Intersectional Variation between Different Industries

Challenge: Variation in intersectoral growth patterns raises problems for cross-sectional comparisons between sectors.

Solution: Be familiar with the specific characteristics of the industry and utilise industry-specific benchmarks for accurate assessment.

Significance of Economic Environment

Challenge: Natural fluctuations in the economy that can negatively (or positively) impact revenues, making it difficult to disentangle internal growth from external ones.

Solution: Consider this wider context while using advanced models to distinguish economic impacts from other factors.

Quality and Accessibility of Data

Challenge: Inadequate or unreliable financial data can impair EGR precision.

Solution: Develop strong financial reporting systems and ensure data accuracy as well as completeness.

Futuristic Orientation

Challenge: EGR is historical in nature, not taking into account future growth prospects.

Solution: Apply EGR together with forward-looking indicators as well as qualitative evaluations to have a holistic picture of growth opportunities.

Fluctuations in EGR

Challenge: EGR is at times volatile, especially owing to the occurrence of irregular external events.

Solution: Volatility factors can be interpreted by relating EGR with other financial metrics as well as qualitative information.

Implementation Challenges

Challenge: The collection of relevant data for EGR may be problematic, particularly for firms whose purchases are not frequent or those that have varied models of business operation.

Solution: Extra care must be taken during the gathering of per-customer revenue data, and a review of industrial factors should also be incorporated.

Complexity in Customer Classification

Challenge: The distinction between earned customers and bought ones could easily be oversimplified and hence may not capture all customer interactions.

Solution: Therefore, an understanding that acquisition of customers involves mixed elements should underlie any approach to categorising customers.

Misleading Data from Customer Responses

Challenge: Customers might fail to give accurate explanations on why they chose particular products, resulting in misleading data.

Solution: It is therefore important to keep in mind biases that exist within customers’ feedback together with their subconscious nature when making purchase decisions.

Challenges Specific to Industries

Challenge: Sometimes, it can be difficult or even irrelevant to ask why customers started buying in some industries where customers have limited choices.

Solution: To avoid misunderstandings about customer loyalty, the EGR analysis must be modified according to the context of each industry.

Wrapping Up

Earned Growth Rate (EGR) helps businesses understand true customer loyalty and revenue growth by focusing on returning customers and their referrals. SurveySparrow makes it easy to track and analyze this data, giving you clear insights to boost growth and enhance customer loyalty. Let’s partner to help your business thrive!

Time is ticking on outdated metrics!

Switch to SurveySparrow and start measuring EGR to reveal your true growth potential

Signup

14-Day-Free Trial • Cancel Anytime • No Credit Card Required • Need a Demo?