Article

Some Have What it Takes to Earn Customer Loyalty

By Frederick F. Reichheld and Christine Detrick

Published on January 19, 2003
min read


Three years into a deep bear market, evidence mounts that investors are disenchanted with their financial services providers. Stock mutual funds are poised to face their first year of net cash outflows since 1988, according to the Investment Company Institute, which will release 2002 numbers this month. Yet somehow, the Vanguard Group, the country's fastest-growing family of mutual funds, has weathered the most prolonged stock market decline since the Depression without layoffs. Moreover, during the first 11 months of 2002, Vanguard attracted more new money to its mutual funds than any other fund company—$43 billion through November, according to AMG Data Services. For the same period, other funds have reported net cash flow declines of as much as 67 percent, and the industry overall took in much less cash than in 2001. Vanguard isn't buying success by increasing advertising—its media budget, as a percent of assets under management, is below spending a decade ago. Neither is the fund group relying on a high- powered sales force or some hot new product. Vanguard's staple remains low costs and market-matching index funds. What Vanguard does have are loyal customers and employees. How loyal? To find out, Vanguard chief executive John J. "Jack" Brennan performed a "Loyalty Acid Test" on a broad sample of customers and front-line employees. More than 70 percent of both groups agreed with this statement: "I believe this organization deserves my loyalty"—a result placing Vanguard among the top tier of American companies. Bain & Co. has given this survey to several thousand customers and employees of companies across the nation, and typically less than half a company's employees believe their firm deserves their loyalty. That, of course, can affect efficiency and customer service. And in a depressed environment like this one, any edge in service can make all the difference. Vanguard isn't the only company turning loyalty into success. When Enterprise Rent-A-Car took the Acid Test, 75 percent of its employees believed the firm deserved their loyalty. Enterprise has recently accelerated past Hertz and Avis to become the industry leader. At Harley-Davidson, the loyalty rate was 80 percent among its unionized employees, almost double the union rate across America. Harley profits are at record levels despite the fact that motorcycles are usually sensitive to economic downturns. Loyalty like this comes from building long-term relationships with employees and customers and showing management devotion to their most pressing concerns. Vanguard offers low fees to all its investors, and rewards longer- term clients with lower fees still. Despite raising fees this month to offset increased costs in the brokerage business, it remains the lowest-cost major fund family. The company also rewards employees who contribute to operating efficiency or help Vanguard funds improve relative performance. At Harley, management insists on win-win solutions, not just profitable solutions. When the time came to build a plant, for example, the company could have mimicked many other Rust Belt manufacturers and abandoned its unions for a right-to-work state. Instead, Harley invited the presidents of its two main unions to join the search committee and, in return, the unions have cooperated with new productivity initiatives. Enterprise showed how much it values customer loyalty after the Sept. 11 terrorist attacks. Normally, the company doesn't offer one- way rentals. But when stranded travelers showed up asking for them, Enterprise complied - even though it lacked the logistics system to track the cars. Getting them back was a nightmare. "There will be losses," chief executive Andy Taylor said at the time. "But right now we're just concerned about taking care of our customers." What these companies have discovered is that loyalty pays, especially in difficult economic times. Building long-term relationships may seem expensive in the short run, but as too many companies are finding out the hard way, cutting corners with your employees and customers can be much costlier. OPINION Frederick F. Reichheld is a Bain & Co. fellow and author of "Loyalty Rules! How Today's Leaders Build Lasting Relationships." Christine Detrick directs Bain's North American financial services practice. Bain Book Loyalty Rules! Learn more about how today's loyalty leaders build lasting relationships.

Three years into a deep bear market, evidence mounts that investors are disenchanted with their financial services providers. Stock mutual funds are poised to face their first year of net cash outflows since 1988, according to the Investment Company Institute, which will release 2002 numbers this month.

Yet somehow, the Vanguard Group, the country's fastest-growing family of mutual funds, has weathered the most prolonged stock market decline since the Depression without layoffs. Moreover, during the first 11 months of 2002, Vanguard attracted more new money to its mutual funds than any other fund company—$43 billion through November, according to AMG Data Services. For the same period, other funds have reported net cash flow declines of as much as 67 percent, and the industry overall took in much less cash than in 2001.

Vanguard isn't buying success by increasing advertising—its media budget, as a percent of assets under management, is below spending a decade ago. Neither is the fund group relying on a high- powered sales force or some hot new product. Vanguard's staple remains low costs and market-matching index funds.

What Vanguard does have are loyal customers and employees. How loyal? To find out, Vanguard chief executive John J. "Jack" Brennan performed a "Loyalty Acid Test" on a broad sample of customers and front-line employees. More than 70 percent of both groups agreed with this statement: "I believe this organization deserves my loyalty"—a result placing Vanguard among the top tier of American companies.

Bain & Co. has given this survey to several thousand customers and employees of companies across the nation, and typically less than half a company's employees believe their firm deserves their loyalty. That, of course, can affect efficiency and customer service. And in a depressed environment like this one, any edge in service can make all the difference.

Vanguard isn't the only company turning loyalty into success. When Enterprise Rent-A-Car took the Acid Test, 75 percent of its employees believed the firm deserved their loyalty. Enterprise has recently accelerated past Hertz and Avis to become the industry leader. At Harley-Davidson, the loyalty rate was 80 percent among its unionized employees, almost double the union rate across America. Harley profits are at record levels despite the fact that motorcycles are usually sensitive to economic downturns.

Loyalty like this comes from building long-term relationships with employees and customers and showing management devotion to their most pressing concerns.

Vanguard offers low fees to all its investors, and rewards longer- term clients with lower fees still. Despite raising fees this month to offset increased costs in the brokerage business, it remains the lowest-cost major fund family. The company also rewards employees who contribute to operating efficiency or help Vanguard funds improve relative performance.

At Harley, management insists on win-win solutions, not just profitable solutions. When the time came to build a plant, for example, the company could have mimicked many other Rust Belt manufacturers and abandoned its unions for a right-to-work state. Instead, Harley invited the presidents of its two main unions to join the search committee and, in return, the unions have cooperated with new productivity initiatives.

Enterprise showed how much it values customer loyalty after the Sept. 11 terrorist attacks. Normally, the company doesn't offer one- way rentals. But when stranded travelers showed up asking for them, Enterprise complied - even though it lacked the logistics system to track the cars. Getting them back was a nightmare.

"There will be losses," chief executive Andy Taylor said at the time. "But right now we're just concerned about taking care of our customers."

What these companies have discovered is that loyalty pays, especially in difficult economic times. Building long-term relationships may seem expensive in the short run, but as too many companies are finding out the hard way, cutting corners with your employees and customers can be much costlier.

OPINION Frederick F. Reichheld is a Bain & Co. fellow and author of "Loyalty Rules! How Today's Leaders Build Lasting Relationships." Christine Detrick directs Bain's North American financial services practice.