The Loyalty Effect 
The Hidden Force Behind Growth, Profits, and Lasting Value
by Frederick F. Reichheld

The introduction of this books states that the average US corporation loses half of its customers in five years, half of its employees in four, and half of its investors in less than one. Through this book the author sets out to demonstrate that this has a direct, negative, consequence on the companies growth and profits. 

Profit normally occupies centre stage in conventional business systems, but profit cannot be the primary focus. Based on years of his company's research, Reichheld contends that the only way to achieve sustainable improvements in performance is to build sustainable improvements in value creation and loyalty. 

According to the author, business loyalty has three dimensions: 

1. Customer loyalty 
2. Employee loyalty 
3. Investor loyalty

Customer retention is the central gauge that integrates all dimensions of a business and measures how well a firm is creating value for its customers. Creating value for customers is the foundation of every successful business system. 

Customer loyalty is too important to delegate. The responsibility belongs squarely on the CEO's desk, with the same kind of attention as stock price and cash flow. 

Inventories of experienced customers, employees, and investors are a company's most valuable assets. Their combined knowledge and experience comprise a firm's entire intellectual capital. Yet measurement of this critical "inventory" is not normally even considered in a corporate balance sheet. And loss of customers, employees, and investors is shrink, even as the typically measured loss of physical inventory. 

Customer loyalty is not simply a matter of marketing. It demands a reconsideration of core strategies and operating principles, and requires fundamental changes in business practices, including: 

Customer targeting 
Hiring strategies 
Measurement systems 

Retention Economics 

In order to incorporate loyalty into your business practice, you need to know what to measure and how to link results to incentives. Retention economics allows companies to make rational dollars and cents decisions. 

Total reliance on a single measure - current period profits - is a form of flying blind. There are many short term measures which can be employed to influence this number, while having no - or more likely - a negative effect on long term profits. 

Reichheld provides the tools with which to measure customer loyalty: 

Customer retention 
Customer net present value 
Customer duration 
Customer loyalty coefficient 
Customer lifecycle profits 
New customer gain rate

These measures are reported on a customer balance sheet and value flow statement, which are analogous to the balance sheet and income statement in financial accounting. Similar measures are also given to employees and investors. 

The Big Picture 

Here is an overview of the steps to becoming a loyalty leader. Reichheld details each step in the book, along with examples from loyalty-based companies. 

1. Building a superior customer value proposition. Your strategy must be centred on offering key customers truly superior value in relation to competitors. 

2. Finding the right customers. Understand the target customers and develop systems to acquire them selectively - volume is not the key. 

3. Earning customer loyalty. Treat customers as assets, do everything to retain those assets and increase lifetime value. 

4. Finding the right employees. People with character, who share the companies values. 

5. Earning employee loyalty. Customer loyalty is directly related to employee loyalty. Employees over time become better at their jobs, better acquainted with their customers, better able to increase value to the customer. Invest in training, development, salary and incentives, career paths to enhance employee loyalty. 

6. Gaining cost advantage from superior productivity. Customer and employee loyalty provides a cost advantage due to lower acquisition cost, higher productivity, revenue growth, cost savings, referrals, etc. 

7. Finding the right investors. Critical to the success of a loyalty strategy is having and keeping the right investors. It is easiest with mutual or private ownership. For public companies, the right investors are those who are predisposed to long term relationships, who pick investments carefully and stick with them, and who believe they will prosper only when customers and employees prosper. 

8. Earning investor loyalty. Investors looking for short term earnings are not conducive to a loyalty based business.

This book is worthwhile reading for leaders who aspire to be customer-driven and who believe in the long term approach to sustained profitability. 

J. D. 
The Loyalty Effect
by Frederick F. Reichheld. 
Published by Harvard Business School Press, Boston Massachusetts, 1996.


Copyright 1999 - Refresher Publications. All rights reserved.

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