An excerpt from the first chapter, "Loyalty and Value."

Loyalty is dead, the experts proclaim, and the statistics seem to bear them out. On average, U.S. corporations now lose half their customers in five years, half their employees in four, and half their investors in less than one. We seem to face a future in which the only business relationships will be opportunistic transactions between virtual strangers.

But are the experts right? Has the time really come to abandon hope and enter the world of fast-money speculators, job-surfing careerists, disposable employees, and fickle customers? Even more important, can companies succeed by embracing opportunism as a way of life? The answer is no, not if they care about long-term growth and profits. Experience has shown us that disloyalty at current rates stunts corporate performance by 25 to 50 percent, sometimes more. By contrast, businesses that concentrate on finding and keeping good customers, productive employees, and supportive investors continue to generate superior results. Loyalty is by no means dead. It remains one of the great engines of business success. In fact, the principles of loyalty—and the business strategy we call loyalty-based management—are alive and well at the heart of every company with an enduring record of high productivity, solid profits, and steady expansion.

With rare exceptions, CEOs have enough experience and common sense to understand what nonsense it is to speak of loyalty’s demise. They know, for example, that a strong customer franchise is critical to business success, and that doing business with people you trust and understand is more predictable and efficient, and thus more profitable, than doing business with uninvested strangers. Yet if CEOs are wise enough to see the power of loyalty, why are defection rates so high? How do they manage to lose half their companies’ customers every five years? The answer is that most of them don’t measure defections and have no idea they’re losing customers at such a rate. Or, if they do suspect the truth, they see it as a problem for the marketing department.

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The Loyalty Effect

Learn more about how to evaluate and prioritize the various investments necessary to create superior loyalty.

But customer loyalty is too important to delegate. It has a crucial effect on every constituency and aspect of a business system; it drives business success and therefore CEO careers. The responsibility for customer retention or defection belongs squarely on the CEO’s desk, where it can get the same kind of attention that is lavished on stock price and cash flow. Consistently high retention can create tremendous competitive advantage, boost employee morale, produce unexpected bonuses in productivity and growth, even reduce the cost of capital. Conversely, persistent defection means that former customers—people, convinced the company offers inferior value—will eventually outnumber the company’s loyal advocated and dominate the collective voice of the marketplace. When that moment arrives, no amount of advertising, public relations, or ingenious marketing will prop up pricing, new-customer acquisitions, or the company’s reputation.

In the mid-1980s, when a group of consultants at our firm began helping clients to improve their customer retention, we believed it was a practical way of increasing growth and profits, and as a kind of bonus, that would enhance employee motivation and pride along the way. The truth was a good deal more complex. We found we could not progress beyond a superficial treatment of customer loyalty without delving into employee loyalty. We found the there was a cause-and-effect relationship between the two; that it was impossible to maintain a loyal customer base without a base of loyalty employees; and that the best employees prefer to work for companies that deliver the kind of superior value that builds customer loyalty. We then found that our concern with employee loyalty entangled us in the thorny issue of investor loyalty, because it is very hard to earn the loyalty of employees if the owners of the business are short-sighted and unreliable. Finally, predictably, we found that investor loyalty was heavily dependent on customer and employee loyalty, and we understood that we were dealing not with tactical issues but with a strategic system,

Customer retention is a subject that simply cannot be confined within narrow limits. We came to understand that business loyalty has three dimensions—customer loyalty, employee loyalty, and investor loyalty—and that they are far more powerful, far reaching, and interdependent than we had anticipated or imaged. Loyalty has implications that extend into every corner of every business system that seeks the benefit of steady customers. Tempting as it may be to delegate customer retention to marketing, what can marketing do to stem the outflow of employees and investors? It is unrealistic to expect any single function to achieve fundamental improvement. Retention is not simply one more operating statistic, it is the central gauge that integrates all the dimensions of a business and measures how well the firm is creating value for its customers.

Here we strike bedrock, because creating value for customers is the foundation of every successful business system. Creating value for customers builds loyalty, and loyalty in turn builds growth, profit, and more value. While profit has always occupied center stage in conventional thinking about business systems, profit is not primary. Profit is indispensable, of course, but it is nevertheless a consequence of value creation, which, along with loyalty, makes up the real heart of any successful, long-lasting business institution. The more consulting work we’ve done over the years, the more clearly we’ve seen that the only way to achieve sustainable improvements in performance is by building sustainable improvements in value creation and loyalty.

Stemming the customer exodus is not simply a matter of marketing; it demands a reconsideration of core strategy and operating principles. Loyalty provides the unifying framework that enables an executive team to modify and integrate corporate strategy and operating practices in ways that will better serve the long-term interests of customers, employees, and investors. Even more important, perhaps, the loyalty framework permits a set of practical measures that executives can use to manage the company’s value creation process, the upstream source of all profits and growth.