The Loyalty Effect – Frederick F Reichheld 1996

This is not a good looking book. To be precise. It is ugly. Very ugly.

 

But it is an incredibly useful book. It tackles the problem or better chance of loyalty in business. 

“Relative retention explains success better than market share, scale, cost position or any of the other variables.” (Reichheld, 1996, p.23). In the brokerage industry and in the advertising industry customer retention correlates highly with profit. Even better: “A sift in retention of as little as 5 percentage points – from, say, 93 to 98 percent – seems to account for more than 20% improvement in productivity.” (Reichheld, 1996, p.13). Customer loyalty is inherently linked to employee and investor loyalty. (Reichheld, 1996, p.viii).

Loyalty is a better measure to steer your company than profit: If you look only at profits you automatically look for the short term. (Reichheld, 1996, p.5). But there are virtuous profits - result of creating value – and vicious profits: the result from destroying the ability to produce value. (Reichheld, 1996, p.6).

The practice of “carefully selecting customers, employees, and investors and then working hard to retain them – in a word, loyalty-based management.” (Reichheld, 1996, p.18).

The Economics of customer loyalty:

You need to start with making distinctions between sales revenue from new customers and those from loyal customers. (Reichheld, 1996, p.35).  “In most businesses, the profit earned from each individual customers grows as the customer stays with the company.” (Reichheld, 1996, p.37). Reasons:

-       while in the beginning there are acquisition cost

-       over time price premiums increase

-       there will be more referrals

-       operating cost decrease as one gets used to each other,

-       per customer revenue grows via by cross selling,

The right customers

Infiniti and Lexus launched at the same time into the luxury car market in the US. Infiniti went after trendsetters driving BMW. While Lexus went for Mercedes drivers who are older and more conservative. They are harder to get but more loyal. (Reichheld, 1996, p.72).

Since inherently loyal customers are incredibly hard to convince to switch, sales people have a tendency to attract low loyalty customers. (Reichheld, 1996, p.82). “customers who glide into your arms for minimal price discounts are the same customers who dance away with someone else at the slightest enticement.” (Reichheld, 1996, p.82). “As the customer quality declines, so does the firm’s ability to deliver value; which in turn discourages good customers, stifles growths, demotivates employees.” (Reichheld, 1996, p.84).

“The smart competitors will find ways to get the best ones (customers) early. And the smartest of the smart will then shift their growth strategy away from new-customer acquisition and toward building and broadening their relationships with the good customers they’ve already won.” (Reichheld, 1996, p.89).

The right employees

“Employees who are not loyal are unlikely to build an inventory of customers who are.” (Reichheld, 1996, p.91). “it takes time to build solid relationships with customers. (…) loyal employees have greater opportunities to learn and increase their efficiency.” (Reichheld, 1996, p.91).

The way to make employees loyal is to make them the shapers of their own fate: make them participate in success and be responsible for the cost (Reichheld, 1996, p.108).

Productivity

One problem of measuring productivity is that most business “treat income and outlays as if them occurred in separate worlds.” (Reichheld, 1996, p.120).”today, employees either control or represent the lion’s share of cost and at the same time (…) how well they serve customers is directly responsible for the lion’s share of revenues.” (Reichheld, 1996, p.120).

“The complete measure for productivity: revenue per person.” (Reichheld, 1996, p.121).

“Since employee control most of the both revenues and cost, companies must alter their employee policies to produce or enhance two effects: employee learning and the alignment of employee and business interests.” (Reichheld, 1996, p.122).

The right investors.

These days it’s all about managing the value to the shareholders, but no one manages the value that could flow FROM the shareholders. (Reichheld, 1996, p.154).“Benefits include the stability of the cash investors provide as well as the value of their advice.” (Reichheld, 1996, p.154).

“(Nike) segmented investors ans tailored its marketing approach to the shareholders it wanted.” (Reichheld, 1996, p.162). “The way Nike did this was to analyse the earnings growth and cashflow patterns it could realistically deliver, sort through the universe of public companies to find those with similar results, and then identify the investors who owned significant positions in those firms. Bymarketing itself to those investors, Nike was able to shift almost 30 percent of its shares into their hands.” (Reichheld, 1996, p.164).

Transforming the value proposition

Is our value proposition healthy? “Customer repurchase rates of 30 to 40 percent show clear dissatisfaction with the value provided.” (Reichheld, 1996, p.256). “Select customers carefully; learn more than any other company about what those core customers value through the whole cycle of shopping, purchase, ownership, and replacement; then redesign channel partnerships, sales and service processes, communications,m product lines, and logistics to deliver outstanding value.” (Reichheld, 1996, p.273).

Partners for change.

“Loyalty leaders like AG Edwards tend to think of loyalty not as loyalty to the company but loyalty to a set of principles that stand ahead of profit. It is this higher-order loyalty that energizes employees, builds customer retention, and, paradoxically, generates cash flow and profits.” (Reichheld, 1996, p.284).

“The secret of alignment is partnership, and the secret to partnership is compensating each partner with a shared interest  in the value he or she helps to create.” (Reichheld, 1996, p.287).