For CRM, Customer Loyalty Rules!

Fred Reichheld, author of Loyalty Rules! (Harvard Business School Press, 2001), says customers fall into one of two categories. "Butterflies" have no loyalty, flitting from company to company at the slightest whim. Businesses usually overinvest in them and meanwhile ignore their most loyal customers, the "barnacles."

"The butterflies have no interest in building a long-term relationship with you and couldn't care less if they are profitable to you," Reichheld says. "You are nuts if you spend a lot of time and energy attracting them or listening to their needs. But most companies spend too much time on these customers."

Indeed, David Harding, a consultant at McKinsey & Co. in Minneapolis, says that typically, only 20% to 30% of customers are the big contributors to profits. "More than half of customers, in my experience, are actually destroying value," he says.

Harding advises companies to stop acquiring low-value customers. For those already on board, try to "sell them up" to more profitable products if you can. And try to minimize service costs to those customers. "Some companies will create options in their call centers that will not allow a low-value customer to actually speak to a live person," he says.

How can you tell in advance who is likely to become a barnacle? Analyses of current and past customers and surveys will give clues as to what values and demographics correlate with loyalty in your markets, Reichheld says. That insight can be applied to future marketing campaigns. "You will learn to target your energies toward the barnacles," he says.

A few companies stand out for their ability to maintain cadres of fiercely loyal customers. "You'll see a range of technological rigor in measuring loyalty at those companies," Reichheld says. Here is his take on how a few of the companies most noted for having loyal customers keep the barnacles attached:

  • Dell Computer Corp.

    "Dell uses [software from Satmetrix Systems Inc. in Mountain View, Calif.,] to get customer satisfaction feedback on products and services. They are very rigorous."
  • Southwest Airlines Co., Dallas

    "They tend not to survey customers, but they really go at it from the employee side. They believe the way you build loyal customers is by having enormously loyal employees."
  • USAA, San Antonio

    "USAA measures customer-retention rates. They have made a science of this to the point that the largest component of the CEO's bonus is driven by retention rates."
  • Cisco Systems Inc.

    "Cisco does a very good job. They have used an online satisfaction survey -- four or five questions. [Results] are automatically routed to top management. Even a customer that's neutral, let alone negative, will be contacted to try to solve the problem."
  • Harley-Davidson Inc., Milwaukee

    "It measures what percentage of their customers have the brand tattooed on some part of their body."

Copyright © 2002 IDG Communications, Inc.

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