Edwards Deming, the Einstein of quality and business success, the true role of enlightened management is Prediction. The Loyalty Effect is about a new management method — and new measurement tools — that allows you to predict with superior accuracy the future growth and profits of any company. LBM is not some vague, futuristic theory about the increasing importance of intellectual capital. Applicable to individuals and organizations alike, LBM offers a breakthrough system for profit growth. Profit is indispensable, of course; nevertheless, profit is always a consequence of value creation. There are three types of Loyalty: Customer, Employee and Investor.

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There is an additional problem with the Reichheld thesis which has to be recognized. Everyone that I know in our business assumes that the increase has to come from treating the customers better in some way. You build relationships with them. You send them letters, birthday cards and newsletters.

You put them on advisory boards and survey them. You give them gold cards and gold card treatment. All of these things cost money, and the extra costs are not factored into these tables. We cannot get the retention rate to increase by just willing it up. He develops three principles: Some customers are predictable and loyal.

They prefer long term relationships Some customers are more profitable than others. They spend more and need less service. Some customers like your products and services more than those of your competitors. We should look for people who have one, two or three of these factors. Customers have what he calls a loyalty coefficient. He describes an insurance company that studied the demographics which explained the loyalty of its customers.

It discovered that: Customers in the Mid West and rural areas tended to be more loyal Customers in the North East, and city dwellers tended to be less loyal. Married people were more loyal than singles Renters were less loyal than homeowners. Young people were less loyal than older people Income levels also affected loyalty. These acquisition methods might be more expensive, but if they resulted in more loyal customers, they would be worth it.

For example: MBNA acquires a very large and intensely loyal credit card customer base by cultivating 3, organizations and developing an affinity card for each. USAA targets a special niche: active duty military officers who are unusually loyal, reliable, and honest customers. Infiniti focusses on fashion and high performance. Lexus owners are older, and more attracted to service, reliability, and long-term value. Lexus got loyal customers by seeking loyalists in the first place.

An auto insurer found that its worst risks and least loyal customers came from respondents to yellow page advertisements. They discouraged their agents from placing such ads. Another company found that recent arrivals in town had higher defection rates. They now ask new applicants how long they have been in town. Progressive Insurance found that the worst customers tend to walk into agency offices off the street. To avoid these customers, the company encourages agents to locate their offices in out-of-the-way office buildings.

Customers who are acquired by coupons and price discounts are less loyal than those who come from other sources.

Companies that expect to achieve sustainable high performance are studying lifecycle profit and tenure patterns, and using this insight to find the right customers. If you look for the right kind of customers in the first place, then you can increase your retention rate without spending additional money.

You have to treat people right, of course, but the job is much easier if you begin with loyal people. So what can we conclude from this effort? Reichheld is right that loyalty the retention rate is vital to success today.

The next step is to use the superior cash flow from superior customers to hire and retain superior employees. Loyal employees are a key factor, in many companies, in having loyal customers. It has some new insights that many companies can put to immediate profitable use. For my part, I will be rethinking my lifetime value calculations to include increasing selling price levels, and decreasing service costs as normal complements of loyal customers.

Chart A.


Frederick Reichheld - The Loyalty Effect (1990s) - Essay Example



Fred Reichheld



The loyalty effect : the hidden force behind growth, profits, and lasting value



The Loyalty Effect


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