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The Loyalty Effect

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The Loyalty Effect

  1. 1. Loyalty Based Management (The Loyalty Effect) Frederick F. Reichheld ‘The Loyalty Effect’ Harvard Business School Press, 1996.
  2. 2. 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/blo gs/fred_reichheld • You can also check his talks on YouTube.
  3. 3. 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%
  4. 4. 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
  5. 5. “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
  6. 6. The benefits of Customer Loyalty: • Increased • Long term revenues and employees reduce market share costs and improve • Sustainable quality growth attracts • Long term and keeps the best customer relations employees exclude competitors
  7. 7. The economics of customer retention The company needs to quantify and profile the lifecycle of profits from long term customers: • Lower acquisition costs • Lower operating costs – Less promotion, smaller – Long term customers sales force make fewer demands on admin and servicing • Long term base profits – Sustained profit on basic • Customer referrals purchases – Bring the right customers • Revenue growth – Customers spend more • Premium pricing over time – Satisfied customers are less price sensitive
  8. 8. Reichheld’s Loyalty Management Strategy 1. Build a superior 5. Earn employee customer value loyalty proposition 6. Gain cost advantage 2. Find the right through superior productivity customers 7. Find the right 3. Earn customer investors loyalty 8. Earn investor 4. Find the right loyalty employees
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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 careers Develop policies which attract, hold, motivate, recognise, reward and serve people who deliver customer value.
  13. 13. 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
  14. 14. 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
  15. 15. “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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. Strive to create so much value for customers that there is plenty leftover for employees and investors
  20. 20. The service-profit chain (Heskith) Employee Satisfaction Profit and Employees Growth Loyalty Internal Customer Quality Productivity Loyalty Customer Value Satisfaction
  21. 21. 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

Editor's Notes

  • In the service-profit chain employee satisfaction is a result of ‘internal quality’ which is measured by the feelings that employees have toward their jobs, colleagues, and companies. This is related to a number of elements that have to be present to ensure employee satisfaction such as workplace design, job design, employee selection, training and development, rewards and recognition, and tools for serving customers.

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