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The Economist calls Fred Reichheld the high priest of loyalty and The New York Times credits him with putting loyalty economics on the map. A director emeritus of Bain & Company and a Bain Fellow, Reichheld founded the firm's Loyalty Practice and established a link between customer loyalty and profitability. He is the author of three books on loyalty: The Loyalty Effect, Loyalty Rules! and Quest for Loyalty. Gartner Fellow Richard Hunter met with Mr. Reichheld in July 2003 and talked with him about the keys to establishing customer loyalty. Interview conducted 24 July 2003
Fred Reichheld has spent a working lifetime researching loyalty. His most important discovery is simple: loyalty pays. Companies that focus on loyalty lead their industries in profitability, companies like Harley-Davidson, eBay, Vanguard and Northwestern Mutual Life. In researching how and why, he discovered that it is not retention, but customer loyalty that drives those profits. They are not the same thing. "We started with the observation that companies with higher customer retention rates have higher profitability," says Reichheld. "We explored root causes. A lot of the economics hadn't been explored thoroughly. Loyalty creates lots of cost and revenue advantages throughout the value chain that accumulate into a big impact on growth and profits.
"Similarly, some customers don't buy from you," he continues, "because they have no current need for your products or services, but they fully intend to buy from you again when they need to. That's loyalty." The question of whether loyalty pays is the difference between a feel-good program and a key contributor to company profits. Michael Treacy, the well-known business consultant, and others have commented that Reichheld is essentially well-meaning but wrong. Treacy has said that customers always seek the best value, not loyalty, and they will change vendors as soon as the value proposition changes. Reichheld has an answer. "You can't build a business by trying to optimize every transaction. So you can't argue that everyone optimizes every deal. The world doesn't work that way. It's too complex. Business is based on relationships, even though accounting doesn't make that clear. Of course, customers want good economic value, but they want more. An extremist might say 'loyalty is all about the emotional side.' But both sides — economic and emotional — are vital." The companies that Reichheld cites as loyalty leaders — companies like Dell — do lots of things well. Dell is also well known for its superior supply chain management. How does Reichheld know that loyalty is the most important thing driving profits for such companies? "That's based on interviews with the CEOs of these companies," Reichheld says. "They talk about principles and delivering a better experience for employees and customers. That's what's at the core in all of these firms." Every company wants customers who will stick with you and promote you, of course. The question is how to get them, or rather, what sorts of companies attract that kind of customer. Build a Trustworthy Reputation "Fewer than half the employees in a typical American firm think their company deserves their loyalty," says Reichheld. "If that's true, customers must be nuts to put more faith in the company than the employees do.
Customers are not tone deaf, notes Reichheld. "Everyone has a reputation in the marketplace and customers look for companies whose ideals overlap with their own. They ask themselves, 'Is this a trustworthy organization that won't take advantage of me when I'm vulnerable?' My argument is that you can't get rich by ignoring the principles that underlie all good relationships." Those principles are no secret, says Reichheld: "Honesty, fairness, integrity, commitment to win/win, not extracting maximum value at the expense of the customer." Since that's pretty much what we all learned in kindergarten, why do only a minority of companies follow these principles? Reichheld says he has struggled with that question for a long time. One reason is that it is easy for people who break the rules to get rich. The media then lionizes those who have behaved selfishly to get rich, and others conclude that that's how it's done. The result is an executive culture that violates the rules of honest relationships, as exemplified by Dennis Kozlowski at Tyco, Richard Scrushy at HealthSouth, and executives at Enron from the Chairman and CEO down. "Too many customers have been abused by marketing gimmicks and gouging price tactics," says Reichheld. "Customers eventually decide that loyal equals stupid. Telephone companies that give the best prices to defecting customers and hotels that charge ten times the market rate for using the telephone in your room — these are examples of gouging the customer." Reichheld offered a personal experience as an example of the right and wrong ways to customer loyalty. "The Four Seasons Hotel chain is a loyalty leader. I stayed at a competitor's hotel in London once and figured out that 45 minutes on the telephone would equal the price of the room. On the other hand, when the Olympics came to Atlanta, the Four Seasons kept their rates stable and gave preference to their loyal customers while every other hotel in town raised their rates. "So you don't have to gouge to succeed. Those who do gouge don't have loyal customers, and the customers will do whatever they can to counter-gouge them. When customers think they are being abused, they will treat the company the same way." Measure, Measure, Measure
"A lot of companies survey customers once or twice a year and they average the numbers across all products and locations. First of all, satisfaction is not the right metric. Secondly, how can an average score once or twice a year be sufficient? Imagine that you only looked at profits averaged across all your product lines only once a year. How good would you be at managing profits? That's how good you will be at managing loyalty. "The right way to gather and report loyalty feedback is to take it as seriously as your financial reporting. That means gathering and reporting at least monthly in a very granular fashion: every branch, every product." "The reporting tools loyalty leaders like eBay use most effectively are enterprise software solutions, not market research tools. The data must go to everyone who needs it — especially line managers and definitely far beyond the market department — and link their rewards to results so they care about it." Reichheld recommends:
"Every customer service team should know whether they are creating detractors or promoters in the customers they touch," Reichheld continues. eBay has software that generates brief email surveys to customers and employees daily. It works in real time. It generates employee bonuses at the team level. It creates dialogue where there's a need for one when the feedback is very positive or very negative. And it does so at a fraction of the cost of a traditional survey. Natural Monopolies Can Benefit Too Governments face unique challenges in terms of loyalty. Customers can't go elsewhere for a driver's license, so there is little incentive for loyalty programs. Reichheld has a radical solution. "I believe freedom of choice is the fundamental factor in all relationships. Most government agencies have done a poor job of dealing with the issue of their natural monopolies. They would be much better off having competitors. Since they don't, as an alternative, they can create competition internally. "State Farm insurance, for example, allows you to deal with any agent you choose. You could apply that to the IRS. You could say, 'I don't want to deal with agent Smith, I want to deal with agent Brown' and if agent Brown was willing to talk to you — if he did not think you were a problem to handle — you could go ahead. IRS teams that compete with other IRS teams for more profitable and happier customer relationships would be better teams. "It is odd," says Reichheld, "that in a government devoted to liberty for all, freedom of choice — the fundamental element of liberty — is removed. You cannot have loyalty without freedom of choice." Loyalty Leads to Growth Reichheld emphasizes again and again that loyalty drives growth. "Loyalty is the core of growth and growth is the engine of profits. To realize those goals you need an effective system for gathering loyalty data and putting in front of the people who need to see it. And it's got to be immune to cheating and gaming. "Creating loyalty requires leaders who are dedicated to something beyond themselves," says Reichheld, "leaders who put principles ahead of their own, selfish, short-term interests. When leaders put those principles first, they create a unity among leaders, employees and customers that unleashes powerful economic forces of growth and loyalty. Look who's growing! In industry after industry, loyalty leaders are growing at a more than twice the rate of their competitors.  |
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