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The Loyalty Effect
The Loyalty Effect: Author Interview
Harvard Business School Press 1996

  Q. Why should we care about loyalty?

  A. There is a loyalty crisis - and itís getting worse. The resulting churn is wrecking our lives, our businesses, and our economy.

Believe it or not, the average company today loses half its customers in five years, half its employees in four years, and half its investors in less than one year.

  Q. Why is that a crisis?

  A. You canít grow when customers are defecting out the back door faster than the salesforce can pull new ones in the front door.

You canít increase productivity (or real wages) when employees are jumping ship while they are still being trained.

You canít manage a long-term strategy when half the owners on January 1 will be replaced by new owners by November 30.

  Q. What is the Loyalty Effect?

  A. The Loyalty Effect is the set of powerful economic advantages which result from loyal customers buying products and services from loyal employees of companies owned by loyal investors. Largely hidden by traditional accounting conventions, these forces are responsible fro the superior performance of many great companies.

Loyalty leader, State Farm Insurance, for example, has managed to price its products competitively, pay its agents more than its competitors and still accumulate more than $20 billion of capital without ever having tapped the capital markets.

  Q. Can you quantify the effect of loyalty?

  A. A five percentage point increase in customer retention in a typical company will increase profits by more than 25%, and growth by more than 100%! Most companies are feeling the dark side of these loyalty economics today. That is, their profits and growth are being devastated by customer retention.

  Q. How can loyalty accelerate growth?

  A. It is much easier to fill a bucket when it isnít leaking. The typical Fortune 500 company, for example, has real annual growth of 2 Ĺ%. If it retains 5% more of its customers each year, real growth will triple to 7 Ĺ%.

  Q. What is the key to getting and keeping loyal customers?

  A. Consistently delivering superior value. And companies can only deliver consistently superior value if they invest in: 1.) Acquiring and retaining profitable, loyal customers, while shedding and discouraging fickle customers and 2.) building a stable base of loyal employees who play a key role in delivering value to these customers.

  Q. Do you think todayís layoffs are hurting customer loyalty?

  A. Layoffs are accelerating the churn and digging us into an even deeper crisis. They destroy employee trust, alienate customers and devastate growth.

  Q. Does this mean all layoffs are bad?

  A. Yes: but sometimes there is no alternative. Take the telephone companies, for example. They are still trying to readjust operations to the radical shift in government regulations. These former monopolies must cut back if they hope to compete with new, low-cost customers.

  Q. How can companies get on a healthy footing once the unavoidable layoffs have been made?

  A. Three words: loyalty, value, partnership. We have to build teams of people who are loyal to the notion that they will prosper only when they create so much value for customers that there will be enough left over to share in as partners.

  Q. You argue that loyalty leaders pursue a business philosophy based essentially on the Golden Rule. Is loyalty about honorable behavior, or making money?

  A. Each time I have discovered a loyalty leader with public ownership, I have personally invested in its stock. My returns over the past three years have been 46% annually, compared to 15% for the S&P 500. Loyalty is about making money - with honor.

  Q. Why does employee loyalty drive productivity?

  A. Todayís jobs are increasingly complex and require sophisticated knowledge of customers, internal processes and technology. Thus, company investments in hiring, training, and development, will only pay off in superior productivity if employees stay and apply their knowledge at the company.

  Q. What is the first step a company must take on the path toward loyalty-based management?

  A. Companies must measure loyalty if they hope to manage it. To escape the tyranny of short-term profit measures, companies must create equally rigorous measures of value and loyalty. And they must quantify the economics of loyalty in their business. Only then can organizations focus the appropriate energy and resources on discovering and eradicating the root causes of customer, employee and investor defections.

  Q. Why is Bain the only major consulting firm with a loyalty practice?

  A. Most consulting firms sell expertise so they organize by industry group. At Bain, we sell results, so we focus on those key factors, which drive measurable impact on growth and profits - such as loyalty.

  Q. Who is responsible for directing loyalty-based management?

  A. The CEO. Loyalty-Based Management is an all-encompassing process, and without the CEOís power, push and vigilance, the companyís plan to implement it almost surely must fail.
Bain & Company  (c) Bain & Company, Inc.