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The Idea in Brief

Despite a flurry of activities aimed at serving customers better, only a few companies have achieved meaningful, measurable improvements in customer loyalty. In manufacturing as well as services, business leaders intuitively know that when customer loyalty goes up, profits do too. Yet few companies have systematically revamped their operations with customer loyalty in mind.

Instead, most companies adopt improvement programs on an ad hoc basis. Hearing about the success of a loyalty leader such as MBNA’s credit card business, which loses customers at half the industry rate, companies copy one or two of MBNA’s practices. They set up customer-recovery units, for instance, that try to save defecting customers – who, because they are probably less homogeneous than MBNA’s customer base, may or may not be profitable. Or they adopt MBNA’s policy of delivering employee paychecks in envelopes labeled “Brought to You by the Customer” – while failing to base the bonuses inside those envelopes on incentives that enhance customer value and loyalty. Not surprisingly, payoffs don’t materialize.

Building a highly loyal customer base cannot be done as an add-on. It must be integral to a company’s basic business strategy. Loyalty leaders like MBNA are successful because they have designed their entire business systems around customer loyalty. They recognize that customer loyalty is earned by consistently delivering superior value. By understanding the economic effects of retention on revenues and costs, loyalty leaders can intelligently reinvest cash flows to acquire and retain high-quality customers and employees. Designing and managing this self-reinforcing system is the key to achieving outstanding customer loyalty.

The economic benefits of high customer loyalty are considerable and, in many industries, explain the differences in profitability among competitors. When a company consistently delivers superior value and wins customer loyalty, market share and revenues go up, and the cost of acquiring and serving customers goes down. Although the additional profits allow the company to invest in new activities that enhance value and increase the appeal to customers, strengthening loyalty generally is not a matter of simply cutting prices or adding product features. The better economics mean the company can pay workers better, which sets off a whole chain of events. Increased pay boosts employee morale and commitment; as employees stay longer, their productivity rises and training costs fall; employees’ overall job satisfaction, combined with their knowledge and experience, leads to better service to customers; customers are then more inclined to stay loyal to the company; and as the best customers and employees become part of the loyalty- based system, competitors are inevitably left to survive with less desirable customers and less talented employees.

The forces in a loyalty-based system are cumulative. The longer the cycle continues, the greater the company’s financial strength. At MBNA, a 5% increase in retention grows the company’s profits by 60% by the fifth year. And at State Farm Insurance Companies, another champion of customer loyalty, small increases in retention create substantial benefits for the company and its policyholders.

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