Customer Reviews

The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value

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I read this book when it was first published and recently re-read it. Those who have checked out my reviews of other books which address many of the same issues already know that I have a bias with regard to "customer satisfaction" and "customer loyalty", agreeing with Jeffrey Gitomer and others that the former is wholly dependent on each transaction and the latter can end (sometimes permanently) because of a single unsatisfactory transaction. The objective for those who have customers (be they internal or external) is to achieve and then sustain their passion about doing business with you. You want them to become evangelists.

Of course, Reichheld fully understands all this. In a brilliant essay which recently appeared in the Harvard Business Review, he shares new research which (again) shows that companies with faithful employees, customers, and investors (i.e. capital sources which include banks) share one key attribute: leaders who stick with six "bedrock principles": preach what you practice (David Maister has much of value to say about this in his most recently published book, Practice What You Preach), play to win-win, be picky, keep it simple, reward the right results, and finally, listen hard...talk straight. In this book, Reichheld organizes his material within 11 chapters which range from "Loyalty and Value" to "Getting Started: The Path Toward Zero Defections." With meticulous care, he explains how to devise and them implement programs which will help any organization to earn the loyalty of everyone involved in the enterprise. He draws upon a wealth of real-world experience which he and his associates in Bain & Company, a worldwide strategy consulting firm. Reichheld heads up its Loyalty Practice. In his most recently published book, Practice What You Preach, David Maister explains why there must be no discrepancy whatsoever between the "talk" we talk and the "walk" we walk. Reichheld agrees, noting that the "key" to the success of his own organization "has been its loyalty to two principles: first, that our primary mission is to create value for our clients, and second, that our most precious asset is the employees dedicated to making productive contributions to client value creation. Whenever we've been perfectly centered on these two principles, our business has prospered." It is no coincidence that the world's most highly admired companies are also the most profitable within their respective industries. I wholly agree with Reichheld that loyalty is critically important as a measure of value creation and as a source of profit but that it is by no means "a cure-all or a magic bullet." Loyalty is based on trust and respect. It must be earned, usually over an extended period of time and yet can be lost or compromised at any time with a single betrayal.

Here are three brief excerpts:

"One common barrier to better loyalty and higher productivity is the fact that a lot of business executives, and virtually all accounting departments, treat income and outlays as if they occurred in separate worlds. The truth is, revenues and costs are inextricably linked, and decisions that focus on one or the other -- as opposed to both -- often misfire."

"Companies cannot succeed or grow unless they can serve their customers with a better value proposition that the competition. Measuring customer and employee loyalty can accurately gauge the weaknesses in a company's value proposition and help to prescribe a cure."

"While every loyalty leader's strategy is unique, all of them build on the following eight elements: Building a superior customer value proposition, finding the right customers, earning customer loyalty, finding the right employees, earning employee loyalty, gaining cost advantage through superior productivity, finding the right [capital sources], and earning [their] loyalty."

Who will derive the greatest value from this book? Decision-makers in any organization (regardless of size or nature) which has been weakened by defections among customers and/or employees. If the primary objectives are value creation and partnership, decision-makers in these organizations must never betray or neglect any of the fundamentals of loyalty-based management: "partnership builds incentive; incentive builds value; value builds loyalty; loyalty builds even greater value." It's as simple and (yes) as difficult as that.

Reichheld lays out both why loyalty matters, and why difficulty in measuring the impact of loyalty has made managers undervalue it in the past. He shows how loyal relationships with employees, suppliers, customers and investors all contribute to a company's long term success.

His insights are profound for anyone building a company. We have used his insights to build our business, and have benefited enormously from the viewpoints expressed in this book.

The Loyalty Effect takes a long, detailed look at the economics of loyalty, providing concrete examples to support the conclusion that the goal of a business must be the creation of sustainable value for customers employees and investors.

Reichheld takes that which many of us hold as "intuitively correct" and adds substance to our intuition. By translating loyalty into the language of accounting and finance, for example, he proves over and over again, that loyalty is a pre-requisitie for proitability. He doesn't argue against profitability...he merely clarifies the order of priorities for management.

I'm a former IBMer and I now run my own management consulting firm. Reichheld's firm is in fact a competitor, and yet I strongly recommend this book to any decision-maker who is interested in breaking through the fluff and securing real-world advice regarding specifc ways to sustain the health of any company.

Rather than reading the "visionaries", the turnaround specialists and the various and assorted geniuses read this. Reichheld, offers a straightforward summary of empirical evidence that correlates high retention rates (of customers and employees) with long-term profitability. While many other authors seem to be pushing their own agendas (and egos), Reichheld is summarizing the collective experience of numerous companies around the world.

Read this book. It will guide you to better business performance whether you're in marketing, finance, engineering, operations, HR or window-cleaning. If you're tired of losing customers and employees, this book may help save your butt! (if you're patient and willing to ask some difficult questions).

This is an outstanding book for explaining and exploring the economic value of keeping a customer. In explaining those benefits, it becomes clearer how important and affordable it is to keep customers. Unlike most business books, which seem to be written by people who cannot use numbers, this one quantifies its points. It also shows you how to do the same for your business. As such, it is a very practical and important resource for every company. I strongly urge you to read and apply these lessons to your business. In many companies, getting new customers is seen as the solution to virtually every problem. However, a lot of times companies have to get new customers because they have disappointed the old ones. You are better off to find out why you are losing customers, and do something about it. Otherwise, you will just spend a fortune to add new customers who will soon leave you for the same reasons. This book also explains a well-known investing phenomenon, that companies with high loyalty rates are great stocks to own (like Coca-Cola, Gillette, and so forth). Did Warren Buffett know this all along? I should mention that I am a management consultant, but have no connection to the firm that wrote this book.

“Loyalty is dead” begins this classic about loyalty. But after you’ve read this book, you'll know that pursuing loyalty pays off. The authors show you many ways to measure the profit of loyalty. Not only is employee loyalty important but also the loyalty of customers and investors. The first step is to build up a set of values for your company. This core task can't be delegated; it must be done by CEOs themselves. Loyalty can't be managed; it must be earned. The book contains many examples of how large companies have done this. What I like most about this book are the hints for substantiating “soft” efforts for loyalty with “hard” figures. Most of the time the authors argue for a focus on the long term. Loyalty-based management is hard work. This is the right book to get you started.

Peter Pick
(...)

Many perceive the word loyalty to be a concept collecting dust. After all, employee turnover across industries today is ten to thirty percent. Businesses are losing customers at a rate of fifteen to twenty percent a year. And we all know that Wall Street is very unpredictable reporting investor turnover for many companies to be as high as one hundred percent annually. Despite these statistics, Frederick Reichheld is optimistic that loyalty is possible and even should be the goal for employees, customers, and investors. He and his colleagues have been studying successful companies for several decades and have found that there are specific key principles and practices that enable organizations to reap high profits, attract talented employees, and maintain investors. He calls these organizations Loyalty Leaders. By reading his book you will not find a "cookie cutter template" to turn your organization around. The process of developing loyalty is much more personal. He will, however, tell you what principles drive loyalty success and share best practices among the strongest Loyalty Leaders. From concrete demonstration and articulation of what some organizations are putting into practice, you can work in your organization to ask the more effective questions, collect the most pertinent data, and design a network that will lead your organization successful forward into the new economy. The underlying principle of The Loyalty Effect is building trust with your constituents-whom Reichheld has as customer, employee, and investor (respectively in order of importance). Customers must trust your ability to deliver, offer service, and most importantly offer value. Everything revolves around value and trust. The Loyalty Leaders introduced in this book all have systems in place to make sure that loyalty practices are built into their business plans. Loyalty does not belong to a specific department like marketing or customer service. Successful loyalty initiatives are owned and articulated at the executive level. The CEO's of Loyalty Leaders are very involved in monitoring and managing loyalty. Loyalty should be at the heart of the business plans. The Loyalty Leaders highlighted in The Loyalty Effect are MBNA, State Farm, Lexus, and Chic-Fil-A. Although there are many industry differences among these organizations, they all have put into their business systems these key loyalty practices:

1. Build Superior Customer Value 2. Find the Right Customers 3. Earn Customer Loyalty 4. Find/Keep the Right Employees 5. Reward Loyalty Performance (Loyalty-Based Compensation) 6. Build Mutually Beneficial Relationships

One awareness that comes to life in the reading of this book is the idea that companies should target their customers with as much care as they choose their employees. Targeting the right customers will help you best serve those customers, reduce marketing expenditure, and ensure wallet share. All customers are not equal. Loyal customers are more profitable when you look at the big picture. For instance, when you look at the acquisition cost, base profit, revenue growth, potential for referrals, and price premium it is easy to see that a customer that has been with you longer is a better return on your investment in acquiring that customer. Especially because some industries don't even break even until a customer has been with the organization from between three to seven years. This same equation can be applied with loyal employees. There is so much information in this book that it is difficult to determine the most significant key points. What surfaces as the key takeaway is that Reichheld asserts that building loyalty is not "a nice thing to do"-it is a business necessity. Loyalty Leaders are setting new records in productivity and surpassing financial goals and objectives. Many perceive the "loyalty effect" to be a good idea, but somewhat "non-tangible." There is an entire chapter call The Economics of Customer Loyalty where Reichheld actually demonstrates how organizations can capture, quantify, and measure the impact of loyalty. This is not "soft skill"-it is a business imperative.

It is a well known fact, but almost impossible to document in most companies, that it is less expensive to keep customers than to find and acquire new ones. Yet, new marketing efforts, incentives based on growth in customers, new sales or even sales calls are often the stated goals. No wonder we send the wrong message to the field. This is the first book I have seen that analytically demonstrates the cost benefit of building customer loyalty. If you are not frequently and periodically surveying your customers to find out how happy they are, what can be improved and what else you can do for them, you are making an expensive mistake. In THE 2,000 PERCENT SOLUTION, by Mitchell, Coles and Metz, there is a Communications Stall chapter. Using analogies and examples, it describes the problems of not communicating openly and clearly, frequently and in many ways, and how to excel in communicating. There are also chapters on The Disbelief Stall - we can't possibly lose so many customers; The Bureaucracy Stall - you mean our policies make it difficult to work with us?; and The Procrastination Stall - okay, we'll survey our customers next year. Read THE 2,000 PERCENT SOLUTION to learn how to identify your stalls, hurdle over them, and find 2,000 percent solutions. Read THE LOYALTY EFFECT to develop your 2,000 percent solutions to retaining happy customers. (Solving a problem is a 100% solution. Getting 20 times that benefit, the goal of this new process gets you a 2,000 percent solution).

This book draws a very important link between two critical (and timely) strategic topics: customer loyalty and retention, and employee recruitment and retention.

Although my current interest is largely the subject of customer relationships, Mr. Reichheld reminds me of the importance of integration. Loyalty initiatives must be integrated! Customer loyalty cannot be achieved without a corresponding commitment to employee and shareholder loyalty. This idea is very important.

The book is extremely well-written and compelling enough to warrant a significant time investment. By focusing case examples on a handful of "loyalty leaders" such as MBNA and State Farm, readers get a very complete picture of best practice.

Readers looking to develop an economic case for loyalty initiatives will benefit particularly by reading Chapter 2, on the economics of customer loyalty, and Chapter 10, on measurement.

[Dan Michaluk is a simulation designer for ExperiencePoint, creators of award-winning business simulations.]

I would recommend the first half of this book (chapters 1-4 & 6) to any business manager or aspiring upstart. Reichheld's "customer lifecycle profit" and "customer value proposition" concepts provide a unique, innovative framework for evaluating your company's philosophies and strategies. The chapter on finding the "right" investor defies almost everything I learned in my MBA program.

The second half of the book explains (in excruciating detail) how to set up measurement and incentive systems based on this loyalty-based framework. Unfortunately, the author only gives passing mention (in Ch. 10) to the fact that these systems are not applicable to many businesses, including technology firms and makers of commodity products. As an IT analyst in a paper company, I got little tangible benefit from Reichheld's discussions.

These days it would be easy to believe that loyalty didn't matter anymore. Customers are going to shop around, employees are going to hunt for new jobs before they get downsized, and investors will be fickle about holding onto stock if its price moves even an inch. Loyalty, says a whole cadre of business gurus, is out of date and irrelevant. Not so, says author Frederick Reichheld, a director of Bain & Company. Companies like Leo Burnet and A.G. Edwards consistently pay the highest salaries, offer high value to customers at competitive prices, have the highest employee retention rates, and have the highest profitability rates. Loyal customers, employees and investors fuel a sustained cycle of growth at these companies. If you want to foster loyalty in your customers, employees and investors, Reichheld has the following advice:

· Make customer value, not profit, the goal.
· Loyal customers are more profitable than new customers. Break up the potential customer base into segments and find out which ones are more likely to be loyal. Target these customers.
· Find and keep the right employees. Getting the right customers will bring you a profit. Invest that profit in loyal employees who will continue to increase value to your customers. Companies with the highest employee loyalty consistently have the highest customer loyalty.
· Find investors with long-term perspective.
· Learn from defections. If customers or employees are leaving the company, find out why. Take actions to correct problems. Learn from mistakes.