Six Principles of Loyalty
Loyalty, what loyalty? Dont 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
havent 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 customers 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.
Reichhelds 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
Reichhelds 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 dont want to keep switching. Its
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
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
- Play to win/win: never profit at the expense of partners. Its
a short-cut to a dead end.
- Be picky: membership must be a privilege.
- Keep it simple: complexity is the enemy of speed and responsiveness.
- Reward the right results: worthy partners deserve worthy goals.
- Listen hard, talk straight: insist on honest, two-way communication
- 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 dont. They dont
compete for every new business that seems profitable for the moment; they
invest only where they see the potential for building sustainable assets
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 dont 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
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 worlds
drift toward complexity by simplifying your organizations 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
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 leaders
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.
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 companys 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 todays 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 anothers commitment to win/win results. Todays compensation
schemes dont align partner interests; they create zero-sum games
in which one player can win only at anothers expense.
Track whats 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.
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
- 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 dont
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.