The CEOs Dilemma

Extracting performance is maybe the simplest way to describe the job of a founder or CEO. Meaning, getting the most from the least. Investing a dollar and maximizing return on that dollar, whether that’s an investment in an employee, technology, a marketing expense, etc. The game is about ROI, Return on Investment. Overall, the CEOs role is about driving performance and ROI of the business, emphasizing the importance of strategic decision-making, resource allocation, and operational efficiency.

It is worth underscoring that one of the most challenging things for a CEO, in terms of knowing how to invest time and money, is prioritizing among competing opportunities and making strategic decisions that will yield the highest return.

Compass + Nail has historically been a strategic consultancy. We work mostly with founders and CEOs in the quest to maximize ROI. That’s our job. And, we’ve been hard at it since 2006. Over those nearly 20 years the business environment has only become more complicated and more dynamic. In and amongst this complexity is the advent of a tsunami of data and analytics. Enter the “Business Intelligence Dashboard,” and with it myriad metrics across any and every aspect of business performance.

As CEOs juggle short-term priorities with long-term strategic goals amongst this onslaught of data, a recurring query from the many CEOs we serve has emerged: “Is there a single barometer of wellness; i.e. business health?” Put another way, CEOs are asking is there one number that governs all other numbers? What should I be watching? Is it revenue, profitability, cash flow, cost of acquisition, lifetime value, customer satisfaction, sell-through rates, NPS, inventory turns, retention rates, ROAS, sentiment scores, DTC stats, sku efficiency, revenue per employee, some amalgam of all of these? Something else?

The blessing of the arrival of 360 degree views of everything has quickly become a curse in that the landscape for leaders has blurred. If you improve one number does it improve all or even any of the other numbers? Are they all independent? Are they interdependent? Which ones provide actionable insights on how to improve? Or, are they all simply stakes in the ground with the assumption that if you make them all better, the business will somehow perform better? The puzzle is complicated, to the extent that one of our clients talking specifically about Power BI, muttered “now I know 600 reasons why I suck.” 

Back to the CEO conundrum of how best to maximize return on investment. All investments. There is an answer. Back in the day, Fred Reichheld (Founder of Bain & Company's Loyalty Practice, and author of The Loyalty Effect) presented the supposition that if your customers were willing to recommend you your business will grow (HBR, The One Number You Need to Grow, 2003). Additionally was the assumption that those same customers will also return for another purchase and another and another. His premise was the recruitment of new customers via loyal advocates is the primary driver of viable, profitable growth. Quite frankly, it isn’t high returns on ad spends, or acquisition efficiency, rather it is high customer retention rates and high recommendation rates from loyal, committed customers that drives growth.

So, is that it, is it your NPS or high retention rates that become your most essential metrics? Well, no. Both are flawed. Neither are diagnostic. Neither reveal profitability potential. Neither tell you the truth regarding how well your brand is at matriculating potential customers from zero purchases to becoming loyal advocates with lots of purchases and lots of purchases over and over again. This being the holy grail for CEOs. Health and wellness is a result of recurring purchase patterns from loyal customers. The hitch though is that if you’re running a business, your problem isn’t that you have a low NPS or low retention rates or low LTV, high CAC, or that a mix of all the metrics you measure are good or bad. Your problem is that you lack visibility of how good your business is at loyalty, at creating long-term relationships with your customers; i.e. at creating brand advocates. All CEOs, founders, CMO’s, etc. are blind to their own circumstance, unclear of how fast, how efficient, how frenetic, how consistent, at what percentage, at what cost, and at what value their entire brand ecosystem is at creating long-term repeat purchase habits among their buyers. And, moreover, where the failure points are along that progression, and whether after all of that, the likelihood those customers will keep-on-keep’n on buying. And, finally, the actual percentile of these ‘advocates’ that are willing and able to tell all their friends and family about you. Only with this visibility can the CEO conundrum be alleviated; meaning, only with this visibility does leadership have the wherewithal to optimize strategic decision-making, resource allocation, and operational efficiency. Only then can leadership make deliberate steps to improve. And, only then does leadership know the profit potential and hence the dollar value of their investments. This angst is from whence we came. 

Compass + Nail emerged from a deep-rooted curiosity about consumer behavior and the dynamics between customers and brands. It was our desire to understand these movements of customers in and out of brands that led to the creation of a tool aimed at bringing visibility to these phenomena. 

The NPS score was a trigger back in 2003. Fantastic, for the first time there was a metric that “indicated” growth. The supposition was, if your customers are more willing than not to recommend you, it portends growth. The world finally had a positive predictor of growth. Fred asked, if you have loyal customers that are willing to advocate, your business will grow. And, Fred went on, back in the day, to pepper us all with myriad proof points why loyal buyers, customers who exhibit repeat purchase behavior are gold (Buy and read The Loyalty Effect by Fred Reichheld). Their advocacy being the most efficient means to drive new customer acquisition. Brilliant. Another book, Blueprint to a Billion (Blueprint to a Billion: 7 Essentials to Achieve Exponential Growth, by David G. Thomson), corroborates the notion that loyal buying advocates are the most critical component to viable growth and profit. No argument here. 

However, there’s a better question. It’s a question our founder has been studying since the mid 1990’s. And, it’s an even better question today because of the complexity of marketing, the advent of the phenomenon of brand switching (Harvard Business Review, The New Science of Customer Emotions, a better way to drive growth and profitability), and the confusion the above mentioned tsunami of data and the many associated dashboards has caused. Exacerbating the issue, the once trusted Net Promoter Score has been called into scrutiny for a number of reasons, most notably, it does not prove causation. Nor does the methodology account for the majority of customers who fall in between the heavily weighted promoters and detractors. As a result, in 2024, only 11% of customer service teams consider NPS as a Key metric (according to Zendesk, Intercom, Ultimate, Salesforce).

The better inquiry then is about causation, across all customers. How efficient are you at creating these advocates, these repeat buyers? Where are the failure points? Exactly how many of your overall buying universe are willing to recommend. How many promoters do you have, how many detractors, and what is happening with the large swath in between? 

Fred asked how likely a customer is to recommend. The critical understanding however is how efficient your brand is at creating these types of customers, the ones that buy over and over again and then go out and sing your praises. Hence, the answer is not in NPS, LTV, retention rates, repeat order rates, or repeat purchase rates. These are downstream biomarkers. They are all the result of something else. It is the ‘something else’ that businesses are not privy to, the upstream causal human behavior of how advocates become advocates is missing. 

The Brand Equity Index™ (BEI) provides this visibility. It is the one metric that governs all other metrics. It reveals the health of your brand in terms of its efficiency and ability creating “best customers.” With it, you will know exactly where to focus your efforts, how to adjust every aspect of your go to market, product presentation, acquisition approach, everything to create best customers.

Here’s the rub, Steve Diller and his co-authors wrote, “Most businesses however don’t invest in relationships with their customers. Relationships are fuzzy, not easily measured, and few businesses treat them as strategic assets (Blind Spot, 2016).” Businesses are relegated to maximizing tactical metrics like ROAS, conversion rates, etc. The shock to reality though is that without an immediately compelling reason for a customer to choose your brand as a one-of-a-kind resource, you are operating in a commodity market, selling a commodity. And worse, the levers you do have to affect improvement have performance ceilings. Cost of traffic increases with increases of traffic (returns diminish). Conversion rate and average order value normalize over time. Email performance normalizes. Optimization only goes so far. The reality is the cost of doing business dependent on the current marcom landscape stunts growth and profitability. One case in point, let’s take Return on Ad Spend, ROAS, of customer acquisition. The zeitgeist of the industry is to achieve as high a ROAS as possible. Business managers noting a profitability quotient as their argument. It’s a false premise. Yes, if I spend a dollar on a marketing vehicle (Google, Facebook, Instagram, etc.) and the ad returns a net positive, a contribution to profit has been made. The logic then is to manage ROAS to a maximum. The true “blind spot” is the efficiency of creating brand advocates from that batch of customers just acquired. Do those customers form a long-term relationship with the business? Do they become the coveted advocates we refer to above, buying over and over again, telling their friends. Are they in a relationship with your brand, long-term? Moreover, how many became these coveted advocates, at what rate, at what cost, and at what percentile? If this is known? And is known to be above the benchmarks that deem profitability and growth, then we have a better picture as to what ROAS is optimal for the overall health and wellness of the business, holistically. And, we’ve come to glean how whatever LTV we have happened. All of a sudden ROAS, LTV, and every other metric has context to the whole. No longer are all metrics isolated instances. All have been contextualized to Steve Diller’s quest, to measure the efficiency of forming relationships with customers. Hence, his declaring it an imperative to manage our businesses based on what he describes is a “strategic asset,” your customers. Now you can. 

Harvard Business Review speaks to the same idea, advising that “Given the enormous opportunity to create new value, companies should pursue emotional connections as a science—and a strategy” (The New Science of Customer Emotions, a better way to drive growth and profitability). Now we can measure the efficacy of just such an endeavor. 

Managing the efficiency of your most important strategic asset is the means to operational efficiency, proper resource allocation, and clarity of how best to apply and manage tactical metrics. This is the reason why we say the BEI is the one metric that governs all other metrics. Using the BEI solves the CEOs dilemma.