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Loyalty Rules! How Leaders Build Lasting Relationships

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Most sequels to business books merely add some more detail to the argument of the previous book. Loyalty Rules! is a happy exception to that circumstance. The Loyalty Effect is a fine and helpful book, but I prefer Loyalty Rules! because it is more practical and explores so many more dimensions of leadership and management. There is also new information in Loyalty Rules! about the economics of customer loyalty for doing business on the Internet.

Many people take the financial incentive to keep customers longer as encouragement to employ all of the latest loyalty-building tools (from data-mining to loyalty incentive programs). Mr. Reichheld is correct that encouraging people to be loyal while treating them with bad service, poor products, or disloyalty in return will not work. He argues instead for a values-based orientation that will remind many people of the principles in The 7 Habits of Highly Effective People.

The essence of the concept for creating loyalty is: "Show your partners [stakeholders like customers and employees] that loyalty is a logical strategy for the pursuit of self-interest when self-interest is defined in the context of lifelong success."

His six principles for building loyalty are paraphrased as follows:

(1) Always play to provide wins for the stakeholder as well as for the company.

(2) Be selective about the employees and customers you take on and encourage to stay with you, so that they enhance your cooperative system.

(3) Keep your approach to being loyal (and earning loyalty in return) simple. For example, "Do right by the customer" was an actionable motto for Intuit when bugs cropped up in its tax software.

(4) Reward providing the right results (which usually means adjusting the way your compensate and motivate people in your organization).

(5) Listen, learn, act, and explain (communication is a two-way street if you are to improve and be reponsive).

(6) Begin with how you want to be remembered when you decide what to say and do today, and then preach with your words and actions to support that end.

The book has fairly well developed examples from Enterprise Rent-A-Car, Vanguard Group, Harley-Davidson, Cisco Systems, Dell, Northwestern Mutual, MBNA, Chick-Fil-A, USAA, the New York Times, the U.S. Marines, and Intuit. There are also references to companies like ServiceMaster, Southwest Airlines, SAS (the computer software company) and other service organizations. The book and the book's web site contain loyalty questionnaires you can use to diagnose how your organization is doing. At the end of chapters 3-8 are directions for how to use the answers you get to direct your next steps.

One big surprise in the book is that it emphasizes the dual idea of having an economic advantage and then using some of the economic benefits of that advantage over competitors to provide better results in ways that will build loyalty. The concept is that you turn a temporary economic advantage into a permanent one by building loyalty. You are directed to another Bain book, Profit from the Core, as the source for how to achieve that initial economic advantage by focusing on your core strength.

Clearly, some of the examples seemed to have as much to do with superior economic advantage (partly helped by employee loyalty) as they did with building customer loyalty. That was especially true of Dell, Cisco, Southwest Airlines, and Enterprise Rent-A-Car. I was left with the question of what to do if your economic advantage erodes faster than you can building an economic advantage from loyalty.

The book suggests that all of this applies to other stakeholders like vendors, partners, lenders, shareholders, the communities you serve, and so forth. Only vendors show up in any specific discussions. It looked to me like much of the advice would work better for a private company or governmental operation (as some of these are) than for a public company with "what have you done for me lately?" institutional shareholders.

Curiously, many companies with very high loyalty but less than perfect ethics don't make it as major cases in the book. What should we conclude about Microsoft, Coca-Cola, MTV, cable television service providers, tobacco companies, and illegal drug dealers? They certainly make outsized profits due to their high customer loyalty. I couldn't tell if Mr. Reichheld is arguing that their success is unsustainable, or socially undesirable.

After you finish enjoying this book, ask yourself what an employer or product/service provider needs to do in order to earn your loyalty. Where do you see positive models of good behavior and assistance that inspire you to reciprocate by providing your loyal support? What lessons do you draw from those experiences which should be applied to your business, consumption, and personal life?

Always start with the question, "What can I do to help you?"

Reichfeld's thesis is that loyalty, more than a fosuc on profits, is what guarantees companies long term success. He uses a handful of examples, including Enterprise Rent-a-Car, Northwestern Mutual, Harley Davidson, Cisco, among others, to make the case that having outstanding loyalty from your customers, suppliers and employees drives outstanding results.

The main rules Reichfeld sticks to and calls the "high road" are the following:
1. Focus on win/win solutions with partners
2. Focus only on clients which you can serve well
3. Focus on simplicity to allow everyone to understand the rules
4. Develop a set of principles and live by them, rewarding others who act according to those principles.

Overall, he makes a strong case to show how these principles can have a positive effect on business. By having low turnover, a fast food restaurant spends very little on HR expenses. By focusing on the bikes their customers love (and not diversifying), Harley gains lifelong customers.

The weakenesses of the book lie in the overemphasis of loyalty, in relation to other important tasks in business. Of course, being a book on loyalty, one could not expect anything different. Additionally, it would have eben useful to have some fake types of loyalty as example of weak attempts at loyalty. I am sure certain companies must have tried to gain loyalty through not-so-smart measures, so it would be nice to haev examples in order to differentiate them.

Overall, it is a very interesting book, useful to anyone involved in customer related businesses and in managing employee relationships. It is short (a benefit) and a bit too concise (a drawback), so it should not take more than a week to read for a regular reader.

A recent re-reading confirms my initial reactions to this book. In a brilliant essay which appeared in the Harvard Business Review, Reichheld shares research which suggests 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, play to win-win, be picky, keep it simple, reward the right results, and finally, listen hard...talk straight. In The Loyalty Effect, 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. Reichheld draws upon a wealth of real-world experience which he and his associates have accumulated at 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.

In Loyalty Rules!, Reichheld develops these and other ideas (the foundation of what he calls an "economic framework") in much greater depth as he explains how today's leaders build lasting relationships beyond as well as within their organizations. "Loyalty cannot begin with tools; it must begin with leaders who recognize the enormous value of building and maintaining mutually beneficial relationships....Accordingly, this book spends at least as much time on the underlying objectives for building loyalty as it does on the how-to's." He organizes his material within eight chapters which range from "Timeless Principles" (previously introduced in The Loyalty Effect) to "Preach What You Practice" in which he asserts that actions speak louder than words and together, they are "unbeatable." One of this book's greatest benefits is provided in a series of "Action Checklists" which reiterate key ideas while suggesting specific initiatives to implement them effectively. The book concludes with an appendix, "The Loyalty Acid Test," which consists of separate surveys of consumers and employees. Obviously, each reader must modify either survey to ensure that it is appropriate to her or his own organization's specific needs and objectives. However, all modifications should be consistent with the 'timeless principles" which Reichheld examines in the first chapter. I highly recommend this book, presuming to suggest that, if possible, The Loyalty Effect be read first.

Not long ago, loyalty was out of fashion. Tom Peters said, "Forget loyalty. Try loyalty to your Rolodex." The magazine Fast Company incited everyone to join the "free-agent nation." Now, loyalty is a hot topic.

The person most responsible for this turnaround is Frederick Reichheld, who published the seminal work, "TheLoyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value," in 1996. Based on studies at Bain & Co., Reichheld determined that loyalty is the primary driver of profitability. The studies found that an increase in customer retention rates of just 5% increases profits by 25%-95%. The right customers, employees and investors who stay with a firm fuel a virtuous cycle of long-term growth that increases profitability,empowers the brand and cuts marketing costs.

"Loyalty Rules!" picks up on the same themes addressed in "Loyalty Effect." It's impossible to generate superior long-term profits without superior customer loyalty. The right measurements and rewards are critical to achieving the right results. The book illustrates how loyalty has made such organizations as Harley-Davidson, Enterprise Rent-A-Car, The Vanguard Group, Southwest Airlines, Northwestern Mutual, Chick-fil-a, and others so successful.

Such success, says Reichheld, results from the emphasis corporate leaders place on six loyalty principles:

o play to win/win
o be picky (membership is a privilege)
o keep it simple
o reward the right results
o listen hard
o talk straight, and preach what you practice

The "Loyalty Effect" was a primer on how to build loyalty. Numerous charts, graphs and even formulas illustrated the cause-and-effect relationships between loyalty and value creation. While "Loyalty Effect" sought to teach and persuade, "Loyalty Rules!" aims to inspire. Organizations should always take the high road. Vanguard employees are "proud to be part of the most ethical organization in the industry." Reichheld approvingly quotes Cisco CEO John Chambers: "Never do anything to competitors that you wouldn't want them to do to you." He encourages leaders "to assume the pulpit and preach about the values at the core of your life and your relationships."

Inspirational stories and advice are balanced by "action checklists" at the end of each chapter. These include specific tips to achieve loyalty, such as "create a golden rule for your firm," "make recruiting an executive priority," "create a customer experience council," and "turn call centers and help desks into strategic listening posts."

Reichheld concludes with a "Loyalty Acid Test." These are sample questionnaires for customers and employees that can diagnose the health of relationships.

Other excellent books on the same topic are Customer Equity: Building and Managing Relationships as Valuable Assets by Blattberg, Getz and Thomas. Also highly recommended is FusionBranding: How to Forge Your Brand for the Future by customer loyalty consultant Nick Wreden, who looks at how to apply customer equity and accountability to branding

In Frederick Reichheld's 1996 book, The Loyalty Effect, he argued that a 5 percent increase in customer and employee retention can increase profits between 25 percent and 100 percent. Taking that as the foundation for his new book, Reichheld reinforces and updates his message that loyalty in the form of mutually beneficial relationships between customers, employees, suppliers, and investors (the first two being primary) is the key to sustained success. He finds that most companies fail the "acid test" of loyalty, with less than half of today's employees believing that their company deserves their loyalty. His current book draws extensively on examples to show how executives can put the loyalty effect to work.

You will find some of the usual suspects throughout the book: Harley-Davidson, Southwest Airlines, Dell Computer, Cisco Systems, Intuit, but also some examples probably less familiar: The Vanguard Group, Northwestern Mutual, MBNA, The New York Times Company, and the U.S. Marine Corps. All the cases make for vivid reading, though abstraction-centric readers can greatly reduce their reading time by going straight the end-of-chapter summaries and application tips. However, the case studies and stories show that the loyalty effect can be put into practice in diverse ways and Reichheld keeps his book below 200 pages.

Underlying the diverse aspects and implementations of loyalty, Reichheld has identified six principles: Play to win/win: profiting at the expense of partners is a short cut to a dead end; Be picky: membership is a privilege; Keep it simple: complexity is the enemy of speed and flexibility; Reward the right results: worthy partners deserve worthy goals; Listen hard and talk straight: long-term relationships require honest, two-way communication and learning; and Preach what you practice.

Stated in summary form, these will probably seem obvious. The detailed vision that the author presents of the principles, however, is not always obvious and certainly is rarely observed with any thoroughness. He analyzes each principle into component ideas. For example, "play to win/win involves "high road strategies" which themselves are further analyzed, along with more thoughts about strategic focus, partnerships, and growing from the core. You should find some rewarding insights with little effort in this book.

In these Internet times, the next store is only a click away. Fewer workers regard their employer to be worthy of loyalty. So is loyalty still of interest? After writing his 1996 classic about loyalty, The Loyalty Effect, Frederick F. Reichheld continues his praise for values and a long-term focus. He demonstrates that business on the Web is based mostly on trust, not on prices. Many examples from successful organizations show how to establish loyalty and how it pays off. You’ll see that employee loyalty is very important for company success, and the author shows ways to earn this loyalty. This book contains many checklists for immediate action plans. And it includes sample questionnaires for checking your employees’ and customers’ loyalty toward your company.

Peter Pick
(...)

In a brilliant essay which appeared in the Harvard Business Review, Reichheld shares research which suggests 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, play to win-win, be picky, keep it simple, reward the right results, and finally, listen hard...talk straight. In The Loyalty Effect, 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. Reichheld draws upon a wealth of real-world experience which he and his associates have accumulated at 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.

In Loyalty Rules!, Reichheld develops these and other ideas (the foundation of what he calls an "economic framework") in much greater depth as he explains how today's leaders build lasting relationships beyond as well as within their organizations. "Loyalty cannot begin with tools; it must begin with leaders who recognize the enormous value of building and maintaining mutually beneficial relationships....Accordingly, this book spends at least as much time on the underlying objectives for building loyalty as it does on the how-to's." He organizes his material within eight chapters which range from "Timeless Principles" (previously introduced in The Loyalty Effect) to "Preach What You Practice" in which he asserts that actions speak louder than words and together, they are "unbeatable." One of this book's greatest benefits is provided in a series of "Action Checklists" which reiterate key ideas while suggesting specific initiatives to implement them effectively. The book concludes with an appendix, "The Loyalty Acid Test," which consists of separate surveys of consumers and employees. Obviously, each reader must modify either survey to ensure that it is appropriate to her or his own organization's specific needs and objectives. However, all modifications should be consistent with the `timeless principles" which Reichheld examines in the first chapter. I highly recommend this book, presuming to suggest that, if possible, The Loyalty Effect be read first.

When the majority of CRM/loyalty books still focus on convincing top management of the importance of CRM/loyalty as if those top management are ignorant of it, the author points to one big blind spot of those decision makers: that there will be no loyal customers if the value/culture of the company does not lead to creation of loyal employees/vendors (partners), absence of which as reflected by the author's six principles of loyalty, (the backbone on which the author elaborates to the full length of the whole book) including:-

1. Play to win/win: Profiting at the expense of partners is a shortcut to dead end.
2. Be Picky: Membership is a privilege
3. Keep it simple: Complexity is the enemy of speed and responsiveness
4. Reward the right results: Worthy partners deserve worthy goals
5. Listen hard, talk straight: Long term relationships require honest, two-way communication and learning
6. Preach what you practice: Actions often speak louder than words, but together they are unbeatable.

I must say that there are some discrepancies between the key samples (Enterprise Rent-A-Car, Dell, Vanguard, Harley Davidson, Cisco, and the Telecom Industry as a counter-example) the author explores on and the personal judgement of readers like me. Still this is an outstanding book with unique insights. Practical and helpful, I must say, though the "High Road Strategy" preached may still be limited to companies that sell higher per unit price products. No matter what, highly recommended amongst the sea of CRM/loyalty books on Amazon.

p.s. Below please find some of my favorite passages for your reference:-

We manage our business with a disciplined strategy, believing that any company can only be great at a few things, And if we do those few things better than anyone else, and focus our success criteria on our clients only, with no other distractions, we will retain our lead in this business and even expand it over time. - Jack Brennan of The Vanguard Group in his 1999 partnership speech to employees. pg 58

Michael Dell emphasizes that it's at least as important for a firm to figure out what you're not going to do as it is to know what you are going to do. pg 64

"Keep it simple" Action Checklist:-
- Examine Loyalty Acid Test scores
- Create a golden rule for your firm
- Obliterate hierarchy
- Break down silos
- Cut incentives that reward leaders for the size and power of their departments
- Ensure that headquarters staff grows at a slower rate than field staff
- Pare down functions to only those in which you can be the best in the business
- Form small teams with clear, simple responsibilities
- Split of separate business early pg 119-120

Loyalty is impossible without trust. Trust is impossible without accurate, reliable information. Develop state of the art communication tools and listening skills so you and your partners can reach deeper levels of understanding that yield clearer priorities, coordinated actions, and superior results. Nothing magnifies the loyalty effect like the trust engendered by open, honest, and direct exchange of information and ideas. pg 149

In today's economy, changing jobs is considered by many as a sign of a successful career. Customers and shoppers are constantly bombarded with challenges to find a better deal. The internet allows a mouse-click to shift purchasing power anywhere in the globe. There is much encouragement to always shop around for better values instead of buying from just one trusted source. What good is loyalty in all of this? Isn't loyalty all but extinct?
The author argues that this is not only wrong, but that loyalty is at the heart of every company that has solid profits, high productivity, and sustained growth. Citing numerous corporate examples, the author submits that the litmus-test for leadership is the ability to build strong bonds of loyalty. The author critiques the type of leadership that takes what he sees as the "low-road" to short term gains at the expense of customers, employees, and eventually investors.
This book is designed to develop loyalty leaders, those that can transform the various loyalties into economic benefits. The author submits certain key principles referred to the "Six Princi0ples of Loyalty:"

· Play to win/win.
· Be Picky.
· Keep it simple.
· Reward the right result.
· Listen Hard, talk straight.
· Preach what is practiced.

These six principles form the foundation for this book, thus creating a step-by-step handbook on leveraging loyalty for profit in any company.

Really good principles on loyalty. A very good attribute to learn and understand in business. Great insight on the "Loyalty Effect". Very good for communication. Will help you get in focus. Learn how to understand your customer. I recommend.