In his book The Loyalty Effect, Fred
Reichheld notes that on average, U.S. corporations lose half
their customers in five years and half their employees in four. On
top of this, he shows that disloyalty at current rates has been shown
to stunt corporate performance by 25 to 50 percent. That's
incredible! For any company looking for long-term growth and
stability, such defection rates are simply unsustainable.
Creating loyalty, then, from customers
and employees is obviously critical. Unfortunately, you simply can't
have loyalty from one without the other. Losing employees becomes a
vicious cycle which can cause customer disloyalty, while losing
customers can cause high turnover in employees. Consider Reichheld's
simple illustration concerning the tangible benefits of maintaining
loyalty:
Imagine two
companies, one with a customer retention rate of 95 percent, the
other with a rate of 90 percent. The leak in the first firm's
customer bucket is 5 percent per year, and the second firm's leak is
twice as large, 10 percent per year. If both companies acquire new
customers at the rate of 10 percent per year, the first will have a 5
percent net growth in customer inventory per year, while the other
will have none. Over fourteen years, the first firm will double in
size, but the second will have no real growth at all. Other things
being equal, a 5-percentage-point advantage in customer retention
translates into a growth advantage equal to a doubling of customer
inventory every fourteen years. An advantage of ten percentage
points accelerates the doubling to seven years.
Besides these considerations, what else
about maintaining loyalty makes it so lucrative? Two things come to
mind immediately. First, most businesses rely on customer referrals
for continued success. In fact, it's hard to imagine a business
grow when there's widespread consumer discontent with its
service and offerings. Fortunately or unfortunately, the opinion of
consumers can circulate in this day and age within a few seconds to
literally millions of other prospects. But the real value of
maintaining customer loyalty is that you always have a ready and
willing pool of customer advocates for your products and services:
and there isn't anything more powerful than having your customers do
your selling for you!
Second, there's a natural relationship
between employee loyalty and customer loyalty that's often not fully
appreciated. Stability within a company is tied to employee
retention. Loyal employees provide a maturity and expertise that's
incredibly difficult to maintain with high turnover. We've all tried
to get help from employees that clearly don't have the history
required to solve our problem. Everyone knows how frustrating this
can be, and how it creates an overall negative perception of the
company.
But the flip side to this is that
companies that tend to have high customer retention also tend to have
high employee retention. At least one reason for this phenomenon is
that employees seem to feel their job has more meaning when the
company can generate such enthusiastic customers, which in turn
bolsters employee morale. It's a circle often overlooked. And
importantly, this cycle leads to higher productivity. As reported by
Conley, the Gallup Organization found that a highly engaged employee
and customer leads to 3.4 times more financial productivity.
Impressive.
The moral? Loyalty is only dead for
companies that foolishly think that success is maintained without
such a focus. Creating an environment that inspires loyalty isn't
easy, but critically important, and in the end the surest way to
guarantee financial success and long-term growth.
