Frederick F. Reichheld

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 <h4 class="ideainbrief-title">The Idea in Brief</h4>
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 Every time the credit-card giant MBNA retains just 5% more customers, its profits expand 60% over the next five years. Clearly, customer loyalty is a key to sustainably superior profits. But it’s also an integral part of a larger profit engine that runs just as much on employee loyalty.
 Here’s how it works: Customer loyalty gains you market share and lowers the cost of acquiring and serving customers. Now you can pay workers more—boosting morale and longevity. Employee experience rises, enhancing customer service—and retention—even more. And so on.
 The Idea in Practice
 How can your company reap the benefits of the customer/employee-loyalty cycle? Build a loyalty system out of these four components:
 The right customers. Your best customers aren’t necessarily the easiest to attract or the most profitable in the short term. They are the ones most likely to do business with you over time. Look for people who buy because of personal referrals, or at standard prices rather than waiting for promotions.
 Lifetime products and services. Tempted to go after whole new markets? It’s actually wiser to stick with existing customer segments you know well—by adding new products and services that anticipate and meet their evolving needs.
 Loyal employees. Employee retention leads to customer retention. Why? Long-term workers get familiar with customers, gain their trust, and become more skilled at meeting their needs. Incent your employees to stay: Increase commissions the longer their customers stay, and base bonuses on customer-retention rates.
 Measures of loyalty. Develop business systems to measure the long-term economic consequences of changing customer loyalty. Monitor the cost, revenue, and profit consequences of the number of customers who stay loyal for how long. In insurance, for example, cost per policy decreases by 18% when customer retention increases by only 5%. Example:&nbsp; 
 The State Farm insurance company has a strong loyalty-based management system, started by targeting the right customers: better-than-average drivers.
 State Farm also offers a lifetime of products and services, encouraging existing customers to buy additional products such as home and life insurance. Its agents work from neighborhood offices, building strong relationships that let them provide personalized service.
 The company’s employees are loyal, too. Agents are independent contractors who sell State Farm products exclusively and invest in building their own businesses. State Farm, in turn, distributes its products only through these agents.
 Finally, State Farm’s loyalty measures support its overall management system. Customer-retention and defection measures are distributed throughout the organization. Agents find a list of nonrenewing customers on their computers each morning, and make follow-up calls to try to retain the accounts.
 The results of this finely tuned system? State Farm enjoys a 90% customer-retention rate—the best performance of all national insurers that sell through agents.
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</article-ideainbrief>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.

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Loyalty-Based Management

To build a profitable base of faithful customers, try loyal employees.

Loyalty-Based Management

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