Loyalty Based Management(The Loyalty Effect)

Frederick F. Reichheld‘The Loyalty Effect’ Harvard Business

School Press, 1996.

Who is Fred Reichheld?• Director of the leading

strategy consultants Bain & Co• Highly respected speaker and

writer on business strategy.• Published ‘The Loyalty Effect’

in 1996. • Also ‘The Ultimate Question’

and ‘Loyalty Rules’.• Blog:

http://www.netpromoter.com/netpromoter_community/blogs/fred_reichheld

• You can also check his talks on YouTube.

The problem identified by Reichheld:

Most corporations lose: • 50% of customers ever 5 years• 50% of employees in 4 years• 50% of investors in less than one year

Disloyalty stunts company growth by 25% to 50%

Reichheld’s solution:

• Customer retention is the best way to measure how well a company creates value

• Creating value for customers builds loyalty• Loyalty builds growth and profit

The fundamental mission of business is not Profit but Value Creation

“Business must be run at a profit , else it will die. But when anyone tries to run a business solely for profit, then also the business must die, for it no longer has a reason for existence.” Henry Ford

The benefits of Customer Loyalty:

• Increased revenues and market share

• Sustainable growth attracts and keeps the best employees

• Long term employees reduce costs and improve quality

• Long term customer relations exclude competitors

The economics of customer retention

• Lower acquisition costs– Less promotion, smaller

sales force

• Long term base profits– Sustained profit on basic

purchases

• Revenue growth– Customers spend more

over time

• Lower operating costs– Long term customers

make fewer demands on admin and servicing

• Customer referrals– Bring the right

customers

• Premium pricing– Satisfied customers are

less price sensitive

The company needs to quantify and profile the lifecycle of profits from long term customers:

Reichheld’s Loyalty Management Strategy

1. Build a superior customer value proposition

2. Find the right customers

3. Earn customer loyalty

4. Find the right employees

5. Earn employee loyalty

6. Gain cost advantage through superior productivity

7. Find the right investors

8. Earn investor loyalty

1: Build a superior customer value proposition

Develop a value proposition that offers selected key customers truly superior value in compared to the competition• Better quality products – – better performance / design– Zero defects

• Better quality service – at each point of customer contact– high performing retail intermediaries– don’t exploit ‘hostage’ customers

2: Find the right customers

Target customers. Look for:• Inherently ‘loyal’ customers – – prefer stable, long term supplier relations

• Profitable customers– Spend more, prompt payers, need less service

• Customers that value your offering more than that of the competition– Fit your strengths with customer needs

3: Earn customer loyalty

Aim to retain customers to increase life time value. Manage loyalty by designing customer-value into:• The product offer• Pricing policies• Employee incentives & bonuses• Service level delivery

4: Find the right employees

Be selective in the people you employ. Look for people who:• Have character and share company values• Have skills to achieve high productivity in long-

term careersDevelop policies which attract, hold, motivate,

recognise, reward and serve people who deliver customer value.

5: Earn employee loyalty

• Invest heavily in developing and training employees

• Career paths and company structures which enable staff to make the most of their abilities

• Share the ‘productivity surplus’ with staff

Loyal employees build loyal customers

6: Gain cost advantage through superior productivity

• Better employee and customer loyalty grows a ‘productivity surplus’

• Employees earn better salaries, but bonuses take a lower percentage of revenues compared to competitors

• Correctly structured incentives also cut expense claims

Reduce costs by making it possible for employees to earn more by providing higher levels of customer

value and service

“Cutting wages does not reduce costs – it increases them. The only way to get a low cost product is to pay a high price for a high grade of human service...” Henry Ford

7: Find the right investors

• Mutual and private-owned companies are inherently more stable and focuses on the long term

• Public companies should target long-term investors / partners

• Investments based on stock market expectations do not foster long term growth

• Growth comes from delivering customer value, not shareholder value

8: Earn investor loyalty

• Investors should earn fair return before bonuses are paid to managers

• Managers are incentivised to re-invest profits where they will create maximum (customer) value

What else?

• Examine failures honestly – why did a key customer defect?

• How do you measure success?• Track retention / defection rates of customers, employees,

investors

• Develop tools and training to analyse failures and continuously improve value

Strive to create so much value for customers that there is plenty

leftover for employees and investors

The service-profit chain (Heskith)

Internal Quality Employee Satisfaction

Employees Loyalty

Productivity

Value

Customer Satisfaction

Customer Loyalty

Profit and Growth

Other sources:

• Heskett, James L., Jones, Thomas O., Loveman, Gary W., Sasser, W. Earl, and Schelsinger, Leonard A. "Putting the Service Profit Chain to Work", Harvard Business Review, (March-April 1994) 164-174

• Heskett, James L., Sasser, W. Earl Jr., and Schlesinger, Leonard A. “The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value.” The Free Press, New York, 1997.

• Reichheld, Fredrick and Sasser, W. Earl Jr. "Zero Defections: Quality Comes to Services." HBR September-October 1990