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Six Principles of Loyalty

“Loyalty, what loyalty? Don’t expect loyalty from customers or employees. They will give you commitment, but not loyalty. Loyalty is unthinking. If you want loyalty, get a dog.”

Fashionable thinking has swung against loyalty in recent years, suggesting it is dead. All those loyalty programmes and CRM systems haven’t helped, as they give the impression you can buy loyalty instead of engraining retention in the way you do business.

But, when Fred Reichheld, author of The Loyalty Effect and Loyalty Rules, was asked if customer loyalty is dead he, not surprisingly, he riled a little.

Reichheld argues that loyalty and commitment are part of the same mindset, which emerges from the customer’s belief that you are not just about short-term profit. Loyalty and commitment are the glue that deliver retention.

Both spring from that five-letter word that we keep coming back to: Trust. The same applies to your investors and employees, of course.

Reichheld’s argument, post-Enron and Worldcom, appears particularly resonant now. “Business leaders too often, take the low road to short-term gains at the expense of employees, customers, and ultimately, investors”, says Fred.

“In a business environment that thrives on networks of mutually beneficial relationships it is the ability to build strong bonds of loyalty, not short-term profits, that has become the acid test of leadership.”

Reichheld’s arguments are helping to beat back the doubters who suspected that, in the age of what Regis McKenna called ‘the never-satisfied customer’, fickleness is becoming the default setting.

Yes, sectors like banking have spent the past few years actually training customers to behave disloyally by encouraging switching through low upfront interest rates on credit cards and mortgages.

But, most people don’t want to keep switching. It’s too time-consuming and too much choice is draining. So, committed customers will stay if they can trust you to look after their interests in the medium to long term.

The paradox is that the more volatile the environment, the more varied the choices, the more people want some certainty to stick to.

Loyalty can be earned only when leaders put the welfare of their customers and partners ahead of their own self-serving interests. Herein lies the paradox of loyalty. If it is really about self-sacrifice - that is, about putting principles and relationships ahead of immediate personal financial gain - what relevance can it possibly hold for business, which is in large part driven by self-interest?

A 5% increase in customer retention yields a 75% increase in customer net present value.

Based on extensive research into companies from start-ups to established institutions, including Harley-Davidson, Intuit, Cisco, and Dell, Reichheld says he has discovered the six bedrock principles of loyalty (or commitment, if you prefer) upon which leaders build enduring enterprises.

  1. Play to win/win: never profit at the expense of partners. It’s a short-cut to a dead end.
  2. Be picky: membership must be a privilege.
  3. Keep it simple: complexity is the enemy of speed and responsiveness.
  4. Reward the right results: worthy partners deserve worthy goals.
  5. Listen hard, talk straight: insist on honest, two-way communication and learning.
  6. Preach what you practice: explain your principles, then live by them.

Principle 1: PLAY TO WIN/WIN

Play where you can win
If you want to win/win, you must have the discipline and focus to play only where you can win. CEOs of top loyalty companies know precisely where they have the wherewithal to win and where they don’t. They don’t compete for every new business that seems profitable for the moment; they invest only where they see the potential for building sustainable assets and relationships.

Protect your partners’ interests
Only by helping partners reach for the stars - by targeting customer value that is even better than the best - can a leader ensure that the organization will stay on the high road to success. Too many leaders shrink from the demands of this goal and don’t insist that their organizations target the very best value. It is much easier, and seems less risky, to shoot for fair or reasonable value.

To ensure that your organization can continue to set the standards of excellence, you must focus on the basics of cost, quality, and timeliness as well as on discovering new levels of excellence for your customers’ lifetime experience.

Play to win/win to achieve sustainable growth. Loyalty leaders' growth rates surpass industry averages across the board.

Principle 2: BE PICKY

Leaders who want to build loyalty and generate the loyalty effect must exercise extreme discipline to protect their partners’ interests. They know that the key to winning is not to make sure their competitors lose, but to make sure their partners win.

Nothing speaks more clearly about your values and principles than your choice of associates and of those promoted to positions of prominence and authority. When it comes to running a business that is worthy of loyalty, not all employees, customers, suppliers, and vendors are in fact equally worthy of membership on your team.

Loyalty leaders understand that they can and should treat everyone honestly and fairly, with dignity and respect; but they also understand that they can afford to be loyal only to those who can help build mutually beneficial relationships that reflect the principles of loyalty.

Picking your employees
Employee behaviors and attitudes - even more than leadership principles and ideals - communicate most directly to customers, suppliers, and others just what the company stands for. Loyalty leaders are uniform in setting high standards for new employees, and they are remarkably uniform in the practices they have learned to attract and retain the right employees. They all create a uniquely attractive opportunity; they are all keenly involved in the recruiting process; they all take pains to ensure that employees’ first experiences on the job reflect their value to the company as well as the values of the company.

Select your customers with care
Being picky about customers may be a foreign concept. Bringing in the right kinds of customers can result in long-term cash flow annuities as well as in continued growth from referrals, and in enhanced satisfaction from employees whose daily jobs are improved when they can deal with appreciative customers. Loyalty leaders are extremely picky about targeting only the right customer - those for whom their firms have been engineered to deliver truly special value.

By maintaining the most rigorous standards for choosing your business partners - your employees, your customers, your suppliers, and your dealers - you will be headed for the high road of loyalty leadership.

The value of having the right customers is demonstrated by eBay. More than half of eBay's new customers are from referrals, dramatically driving down customer acquisition costs.

Principle 3: KEEP IT SIMPLE

To be an effective leader you must resist the world’s drift toward complexity by simplifying your organization’s structure, systems for measuring progress, and rules for decision-making. You must pare away the distractions and focus on the relatively few principles and practices that make a vital difference in creating superior value. Loyalty to a clear and simple set of principles is the basis for flexibility and speed.

Keep score
If you want your partners to act according to simple rules, you must help them track their progress with simple scorekeeping systems that can be trusted to remain stable over time. Keeping score is one of a leader’s most powerful tools for clarifying the rules and focusing the energies of his or her people. Therefore, loyalty leaders try not to change company rules because this creates confusion and complexity.

Outsource effectively
One of the greatest opportunities to simplify in the interests of organizational speed and flexibility is to outsource all functions for which you cannot provide uniquely outstanding customer value. The advent of the Internet has opened up even more opportunities to outsource effectively.

Utilize small teams
Loyalty comes naturally within a small team. Thus many loyalty leaders utilize small teams as the molecular structure of their organizational design. In many cases they have the smallest headquarter operations in their industry. When you build an organization of decentralized, locally managed teams, and when you outsource all non-strategic functions to best-in-class partners, there is very little need for a large headquarters organization.
The axiom of loyalty leaders is to “keep it simple” because they know that loyalty depends on simplicity and that simplicity does not come naturally in most human organizations. So they constantly reaffirm the company’s simple values and operating principles. They obliterate hierarchy. They break teams into small units with local leadership and direct accountability. They initiate simple, breathtaking challenges that concentrate minds, focus energy, and inspire their people to achieve more than they ever dreamed possible. This is your simple challenge.

Principle 4: REWARD THE RIGHT RESULTS

Most of today’s corporate rewards systems are designed to be reasonable and, therefore, easy to justify to the board of directors or to an outside auditor. But the problem is that loyalty is not generated by reasonable performance; it is generated by over-achievement - and this level of performance requires outstanding teamwork by partners who trust one another’s commitment to win/win results. Today’s compensation schemes don’t align partner interests; they create zero-sum games in which one player can win only at another’s expense.

Track what’s important
Your partners are smart enough to know that anything you truly care about, you measure. To show them that loyalty is at the top of your leadership agenda, measure the health of key relationships and the level of loyalty you are earning.

Many loyalty leaders have developed a clear metric for customer value. The trick is to home in on the relatively few dimensions of performance that really matter to your target customers, and then to track performance with the same rigor that most companies apply to their profit statements.

Reward the right results
Most executives want to be considered responsible and cost-conscious managers, so they feel obliged to keep a lid on compensation. Many loyalty-based firms show enormous cost advantages even while they compensate their people well in excess of market rates. Both productivity and loyalty grow whenever there is opportunity for greater rewards. And whenever your employees create exceptional value for your customers and for your other partners, they deserve exceptional rewards.

Align incentives
Retaining and motivating your stars means offering them the opportunity to earn outstanding compensation. But in the long run, it is not the money alone that keeps most of them motivated. The real incentive is the gratification that comes from using their gifts to their fullest potential and from creating truly extraordinary value for their customers and partners.

Reward the right results to retain the right people - long-term employees create value.

Principle 5: LISTEN HARD, TALK STRAIGHT

The Internet is redefining competitive economics and raising the standards of excellence, but the basic rules of good communication remain constant. You cannot simply layer new communication tools on top of a fundamentally flawed, low-trust communication culture. The result will be simply more communication. The key to better relationships, better businesses, and better lives is not more communication, but better communication. Results of better communication

  • Helps partners focus more efficiently on the vital, few priorities where they can truly improve the value provided to their customers and to each other
  • Helps partners understand the big picture and coordinate actions
  • Candidly assesses their performance and shows them how to create better results
  • Builds trust by ensuring that information received is reliable, and that information shared will be used to build a better relationship, never abused for selfish gain

The communications networks at high-loyalty firms are based on four components essential to superior business relationships: listening, learning, acting, and explaining. As a loyalty leader it is your job both to learn and to teach the art of communication and how these four essentials work in a dynamic, self-sustaining, perpetual cycle.

Principle 6: PREACH WHAT YOU PRACTICE

"Practice what you preach" has become a cliché precisely because it rings with the truth. Loyalty leaders know that their actions speak volumes. You must become a role model, a living example of how your principles can be put into practice. You must be ever-vigilant to ensure that company policies and procedures are fully aligned with your loyalty principles.

You can neither practice nor preach effectively until you articulate your principles clearly. Write down your guiding principles. The discipline involved in the process of writing will deepen your own understanding, compelling you to define your terms precisely and to recognize and resolve any inherent inconsistencies in your logic or discrepancies in your message.

Once you have crafted your sermon, teach all your partners what you stand for, how to put the principles into practice in daily activities, and, in turn, how to spread the message to others. Loyalty leaders don’t delegate this critical task; they assume personal responsibility for teaching the core principles to the rest of their organization.

The essence of loyalty is not self-sacrifice. On the contrary, it is the only way to achieve your long-term interests. A vital step toward building loyalty is to show your partners that loyalty is a logical strategy for the pursuit of self-interest when self-interest is defined in the context of lifelong success, not success just for today, this quarter, or this year.

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