1. Loyalty Based Management
(The Loyalty Effect)
Frederick F. Reichheld
‘The Loyalty Effect’ Harvard Business
School Press, 1996.

2. Who is Fred Reichheld?
• Director of the leading
strategy consultants Bain & Co
• Highly respected speaker and
writer on business strategy.
• Published ‘The Loyalty Effect’
in 1996.
• Also ‘The Ultimate Question’
and ‘Loyalty Rules’.
• Blog:
http://www.netpromoter.com
/netpromoter_community/blo
gs/fred_reichheld
• You can also check his talks on
YouTube.

3. The problem identified by Reichheld:
Most corporations lose:
• 50% of customers ever 5 years
• 50% of employees in 4 years
• 50% of investors in less than one year
Disloyalty stunts company growth
by 25% to 50%

4. Reichheld’s solution:
• Customer retention is the best way to
measure how well a company creates value
• Creating value for customers builds loyalty
• Loyalty builds growth and profit
The fundamental mission of business
is not Profit but Value Creation

5. “Business must be
run at a profit , else
it will die. But when
anyone tries to run a
business solely for
profit, then also the
business must die,
for it no longer has a
reason for
existence.” Henry Ford

6. The benefits of Customer Loyalty:
• Increased • Long term
revenues and employees reduce
market share costs and improve
• Sustainable quality
growth attracts • Long term
and keeps the best customer relations
employees exclude
competitors

7. The economics of customer retention
The company needs to quantify and profile the lifecycle
of profits from long term customers:
• Lower acquisition costs • Lower operating costs
– Less promotion, smaller – Long term customers
sales force make fewer demands on
admin and servicing
• Long term base profits
– Sustained profit on basic
• Customer referrals
purchases – Bring the right
customers
• Revenue growth
– Customers spend more
• Premium pricing
over time – Satisfied customers are
less price sensitive

8. Reichheld’s Loyalty Management
Strategy
1. Build a superior 5. Earn employee
customer value loyalty
proposition 6. Gain cost advantage
2. Find the right through superior
productivity
customers
7. Find the right
3. Earn customer investors
loyalty 8. Earn investor
4. Find the right loyalty
employees

9. 1: Build a superior customer value
proposition
Develop a value proposition that offers selected key
customers truly superior value in compared to the
competition
• Better quality products –
– better performance / design
– Zero defects
• Better quality service
– at each point of customer contact
– high performing retail intermediaries
– don’t exploit ‘hostage’ customers

10. 2: Find the right customers
Target customers. Look for:
• Inherently ‘loyal’ customers –
– prefer stable, long term supplier relations
• Profitable customers
– Spend more, prompt payers, need less service
• Customers that value your offering more than
that of the competition
– Fit your strengths with customer needs

11. 3: Earn customer loyalty
Aim to retain customers to increase life time
value. Manage loyalty by designing customer-
value into:
• The product offer
• Pricing policies
• Employee incentives & bonuses
• Service level delivery

12. 4: Find the right employees
Be selective in the people you employ. Look for
people who:
• Have character and share company values
• Have skills to achieve high productivity in
long-term careers
Develop policies which attract, hold, motivate,
recognise, reward and serve people who deliver
customer value.

13. 5: Earn employee loyalty
• Invest heavily in developing and training
employees
• Career paths and company structures which
enable staff to make the most of their abilities
• Share the ‘productivity surplus’ with staff
Loyal employees build loyal customers

14. 6: Gain cost advantage through
superior productivity
• Better employee and customer loyalty grows a
‘productivity surplus’
• Employees earn better salaries, but bonuses take
a lower percentage of revenues compared to
competitors
• Correctly structured incentives also cut expense
claims
Reduce costs by making it possible for employees to
earn more by providing higher levels of customer
value and service

15. “Cutting wages does
not reduce costs – it
increases them. The
only way to get a
low cost product is
to pay a high price
for a high grade of
human service...”
Henry Ford

16. 7: Find the right investors
• Mutual and private-owned companies are
inherently more stable and focuses on the
long term
• Public companies should target long-term
investors / partners
• Investments based on stock market
expectations do not foster long term growth
• Growth comes from delivering customer
value, not shareholder value

17. 8: Earn investor loyalty
• Investors should earn fair return before
bonuses are paid to managers
• Managers are incentivised to re-invest profits
where they will create maximum (customer)
value

18. What else?
• Examine failures honestly
– why did a key customer defect?
• How do you measure success?
• Track retention / defection rates of customers, employees,
investors
• Develop tools and training to analyse failures
and continuously improve value

19. Strive to create so much value for
customers that there is plenty
leftover for employees and investors

20. The service-profit chain (Heskith)
Employee
Satisfaction
Profit and Employees
Growth Loyalty
Internal
Customer
Quality
Productivity
Loyalty
Customer
Value
Satisfaction

21. Other sources:
• Heskett, James L., Jones, Thomas O., Loveman, Gary
W., Sasser, W. Earl, and Schelsinger, Leonard A. "Putting
the Service Profit Chain to Work", Harvard Business
Review, (March-April 1994) 164-174
• Heskett, James L., Sasser, W. Earl Jr., and Schlesinger,
Leonard A. “The Service Profit Chain: How Leading
Companies Link Profit and Growth to Loyalty,
Satisfaction, and Value.” The Free Press, New York,
1997.
• Reichheld, Fredrick and Sasser, W. Earl Jr. "Zero
Defections: Quality Comes to Services." HBR
September-October 1990