Live from CRM Summit: Lessons from Loyalty Leaders
Most firms still can’t resolve the paradox that “business is about greed and self-interest, and loyalty about self sacrifice.” That’s the view of Fred Reichheld, Bain fellow, Bain and Company, and author of the 1996 bestseller “The Loyalty Effect.”
When asked if certain firms deserved their loyalty, for example, only 45% of the customers surveyed said that they did, Reichheld said. However, that rate went up to 70% for “loyalty leaders.”
And what makes a leader?
Leaders “see economics differently than most accountants,” said Reichheld, speaking today at Gartner Group’s Spring CRM Summit in Chicago. And it starts with the way they treat their employees.
Take Chick-fil-A, the fast-food chain, which has a 95% retention rate among store operators. The average tenure at the company is 20 years, and with good reason–Chick-fil-A pays two or three times what McDonald’s pays, and it is closed on Sundays.
Then there’s Enterprise, the rental car firm, and the largest hirer of new college graduates in the country. The firm offers higher pay, and yet its prices are 20% lower than those of Hertz or Avis.
It isn’t enough just to make employees happy; they also have to be rewarded, and organized, in the proper ways.
For example, Enterprise pays bonuses based on profits, but nobody gets a promotion without high customer satisfaction scores,” Reichheld said.
Enterprise also refuses to let its branches get too big; they get split in two when they reach a certain size. Smart firms Southwest Airlines has a similar policy; it insists on teams with only ten people per supervisor, while its competitors have 20.
“Accountants like to have lots of people per supervisor, but that misses the idea of human motivation and loyalty,” Reichheld added.
Companies also encourage disloyal behaviors. “A magazine subscription is almost free to start, but the price goes up if you’re stupid enough to reorder,” Reichheld continued. “Many suppliers screw long-term customers.”
In contrast, Vanguard, the investment firm, “gives me a better deal after years than if I was a new customer,” Reichheld noted. (Not that price has much to do with loyalty. “Do you want to destroy a company? Do a price promotion,” Reichheld said. “Price pulls the pond scum to the top of the pond.”)
Smart companies also try to understand their customers. One is the insurance company State Farm. While almost 80% of the customers said they were satisfied, the firm still had felt it had to do a better job of retention. So it surveyed defectors.
State Farm found that “the number one root cause for defections was not of its making,” Reichheld said. “It was when someone bought a new car.”
In most cases, the car was more expensive, which automatically jacked up the cost of the insurance. State Farm decided to go into the auto loan business. The agent selling the loan can often sell coverage.
The firm also added several insurance lines, realizing that retention is greater when there are several products.
Credit card issuer MBNA also took the time to understand its customers, and to make sure it had the right ones. It found that teachers are exceptionally loyal and therefore four times as valuable as average cardholders.
The result? MBNA has a “rich” base of customers, which also includes engineers, doctors, and other professionals with a high propensity for loyalty. “The competition is living on leftovers,” said Reichheld, whose next book, “Loyalty Rules,” will appear this summer.
And how does one judge loyalty? There are many metrics, but perhaps the best one is this: An employee at Harley-Davidson told Reichheld, “We don’t have a retention unit. We have a demo logical graphics unit, which tells how many of our customers have a tattoo on bodies.”
