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).

Up in the Old Hotel - Joseph Mitchell (1992)

For me this is the first American book that relishes in the history and the times past. That eschews that any thoughts that everything will be better. It’s author describes the New Yorkers 1940 through the 1960s – from outsiders to everyday people. His philosophy is well summarized by one of his characters Joe Gould:

“”’The history of a nation is not in parliaments and battlefields, but in what the people say to each other on fair days and high days, amd in how they farm, and quarrel, and go on a pilgrimage.’ All at once, the idea for the Iral History occurred to me: I would spend the rest of my life going about the city listening to people – eavesdropping, if necessary – and writing down whatever I heard them say that sounded revealing to me, no matter how boring or idiotic or vulgar or obscene it might sound to others.” (Mitchell, 1992, p.644).

But this is just an excuse to write the most important oral history for anyone: about ourselves. “Gould would quote from the Oral History while the gin and beer were gradually taking hold, and then he would lose interest in the Oral History and talk more and more about himself. He seemed to think that no detail in his life was too trivial to tell about.” (Mitchell, 1992, p.674).

When he finds out that Joe Gould did not actually wrote the Oral History the author is not disappointed: “Anyway, I decided, if there way anything the human race had sufficiency of, a sufficency and a surfeit, it was books. When I thought of the cataracts of books that were pouring off the presses of the world at that moment, only a very few of which would be worth picking up and looking at, let alone reading, I began to feel that it was admirable that he hadn’t written it.” (Mitchell, 1992, p.693).

In his life Joe Gould created a more interesting character, than his book probably would: “He had come to Greenwich Village and had found a mask for himself, and he had put it on and kept it on. The Eccentric Author of a Great, Mysterious, Unpublished Book – that was his mask. And, hiding behind it, he had created a character a good deal more complicated, it seemed to me, than most of the characters created by the novelists and playwrights of his time.” (Mitchell, 1992, p.693).

But. By definition, more important than the ‘philosophy’ of this Oral History are the stories and observations that Mitchell shares in his book:

“Their guesses range between sixty-five and seventy-five; he is fifty three. He is never hurt by this; he looks upon it as a proof of his superiority. “I do more living in one year,” he says, “than ordinary humans do in ten.” (Mitchell, 1992, p.54).

“Practicing short hand takes her mind off herself.” (Mitchell, 1992, p.104).

“Commodore Dutch is a brassy little man who has made a living for the last forty years by giving an annual ball for the benefit of himself. “I haven’t got a whole lot of sense,” he likes to say, “but I got too much sense to work.”” (Mitchell, 1992, p.118).

About alcohol: “”If I was to get a skinful,” he says, “I would stay right in and insult everybody I know. I would make enemies and enemies don’t pay dues.” (Mitchell, 1992, p.123).

“that did not help me to conquer the feeling that I had no right to knock on tenement doors and catechize men and women who were interesting only because they were miserable in some unusual way.” (Mitchell, 1992, p.138).

“he is a good listener; he is one of hose who believe very little of what they hear but always look and act as if they believe every word.” (Mitchell, 1992, p.175).

“And while I’m on the subject, you’ll never understand gypsies until you understand how they feel about stealing. It’s simple: they believe they’re born with the right to steal, and the reason they give, they tell the blasphemous story there was a gypsy in the crowd that followed Jesus up the hill, and on the way this gypsy did his best to steal four nails that the Roman soldiers had brought with them to nail Jesus to the Cross – two for Jis hands, one for His feet, and one that was extra long for his Head or His heart, whichever they decided to drive it through – but the gypsy succeeded in stealing only one, and it was the one that was extra long, and when the soldiers got ready to use it and couldn’t find it they suspected the gypsy and beat him bloody trying to make him tell where he had put it, but he wouldn’t, and while Jesus was dying he spoke to the gypsy from the Cross and said that from then on gypsies had the right to wander the earth and steal.”” (Mitchell, 1992, p.180-1).

“I wanted these stories to be truthful rather than factual, but they are solidly based on facts.” (Mitchell, 1992, p.373).

“”This is something I got not business telling a young man,” Mr. Flood said, “but the pleasnatest news to any human being over seventy-five is the news that some other human being around that age just died. That’s provided the deceased ain’t related, and sometimes even if he is. You put on a long face, and you tell everybody how sad and sorrowful it makes you feel, but you think to yourself, ‘Well, I outlived him. Thank the Lord it was him and not me.’ You think to yourself, ‘One less. More room for me.’” (Mitchell, 1992, p.401).

“”Tommy, my boy,” he said, “I don’t know. Nobody knows why they do anything. I could give you one dozen reasons why I prefer the Fulton Fish Market to Miami, Florida, and most likely none would be the right one. The right reason is something obscure and way off and I probably don’t even know it myself.” (Mitchell, 1992, p.408).

“refrigerators so big they’re all out of reason, cars that reach from here to Rossville – but they aren’t built to last, they’re built to wear out. And that’s the way the people want it. It’s immaterial to them how long a thing lasts. In fact, if it don’t wear out quick enough, they beat it and bang it and kick it and jump up and down on it, so they can get a new one. Most of what you buy nowadays, the outside is everything, the inside don’t matter.” (Mitchell, 1992, p.515).

“In New York City, especially in Greenwich Village, down among the cranks and the might’ve beens and the would-bes and the never-wills and the God-knows-whats, I have always felt at home.” (Mitchell, 1992, p.623).

“I listened to him when he was cast down and meek – when, as he used to say, felt so low he had to reach up to touch bottom.” (Mitchell, 1992, p.627).

Pushkin - Boris Godunov

Just right. But ugly.

Changing the world is the only fit work for a grown man – Steve Harrison 2009

Gossage is often credited with invening interactive advertising before it was interactive.

But this book shows that there is more to it.

Modern interactive advertising means often not interaction but clicks and likes or get them to product content for you (whatever that means). For Gossage the fun and the greatness of interaction is in taking people serious. Doing something worthwhile with their contributions. Respond to what they write or do and elevate it. To a place we couldn’t reach ourselves. This way, all of his famous campaign are prime examples of building communities (real communities of interest rather than facebook groups).

“In contrast, Weiner & Gossage was less an agency and more a mix of social club and symposium. (…) Very often long conversations had nothing to do with the clients’ business: people were invited to drop in and just spend the day in animated discussion with the agency boss.” (Harrison, 2009, p.33).

“People read what interests them, and sometimes it’s an ad.” (Gossage in Harrison, 2009, p.46). “Here he is explaining that approach: “We can do one ad at a time. Literally, that’s the way we do it. We do one advertisement and then wait to see what happens; and then we do another advertisement. Oh, sometimes we get way ahead and do three. But when we do, we often have to change the third one before it runs. Because if you put out an advertisement that creates activity, or response, or involves the audience, you will find that something has happened that changes the character of the succeeding ads.” (Harrison, 2009, p.58).

“If, as Norbert Wiener asserted, feedback is a method of controlling a system by reinserting into it the results of its performance then, to Gossage, the adman and the audience were linked into one inclusive information loop, and the feedback that came round that loop enabled the adman to write ever more interesting and involving communications.” (Harrison, 2009, p.61).

“”Gossage was certainly influenced by information loops and the whole theory that things went out and came back and went out and came back to you, and I think that’s what he tried to exploit. And in a way I think it was a way of overcoming the loneliness of modern times.” (Harrison, 2009, p.61).

“This waiting for feedback put Gossage under extreme pressure. As his wife Sally recalls. “He was always under the gun because he didn’t write a whole campaign ahead or anything like that. He’d get inspired to write one piece, and he would wait and see what the response was. But it always came and it always fed him, and he would be up all hours fashioning the next one.”” (Harrison, 2009, p.62).

““I will go further and say that it is not only wrong to attempt to influence an audience without involving it but it is unethical and dishonest.”” (Harrison quoting Gossage, 2009, p.62).

“Answer: the humble coupon.” (Harrison, 2009, p.63). “He’d put one in that said we’re not expecting you to buy anything, just write to us some time and tell us how things are going’. That was a coupon! And he would spring off of things that people wrote in and write another ad that said ‘Bob from Dallas just wrote to us …’ He would make an ad out of the last thing that happened. It was very interactive and very much like what happens on the internet.” (Harrison quoting Jeff Goodby, 2009, p.63).

“”Never confuse the message with the product”. By that he meant that while the advertisement might be for a certain product, it wasn’t necessary for the ad to be about the product. “(Harrison, 2009, p.64).

 “In defining a “pseudo-event”, Boorstin could easily have easily have been describing any one of Gossage’s ideas: “It is planted primarily (not always exclusively) for the immediate purpose of being reported or reproduced. Therefore, its occurrence is arranged for the convenience of the reporting or reproducing media. Its success is measured by how widely it is reported.” (Harrison, 2009, p.81).

“Reality is not what happens but is controlled by what is written.” (Harrison, 2009, p.82).

 “As Gossage explained, most advertising hitched a ride on the back of such media as newspapers, magazines, radio and TV. It was advertising’s jobto catch the audience’s attention by being as interesting, if not more so, than the content around it. But, as he argued, in the case of billboards the content around it was the countryside or the cityscape. And no “media owner” had the right to sell that media because the view that the billboard was interrupting belonged to the people.” (Harrison, 2009, p.87).

“McLuhan asserted that electronic Media were an extension of our central nervous system. (…) they gave us a shared sensitivity and sensibility that cut across such barriers as nationality, geography and gender.” (Harrison, 2009, p.94).

 “”Let the audience in on the gag. Better still, let them know that you know that they know; this makes it cozier and much more involving. You see, the objective is not fun and games, but warmth and community of interest.” (Harrison, 2009, p.106).