Fred Reichheld is the author of the book, The Ultimate Question: Driving Good Profits and True Growth. Acclaimed by business leaders as the “godfather of customer loyalty, Reichheld’s most recent book shows organizations how to achieve organic growth, tell the difference between “good” and “bad” profits, and turn customers into valuable allies. A New York Times, best-selling author, Reichheld helps organizations garner superior results through improvements in customer, employee, partner, and investor loyalty. His pioneering work has quantified the linkage between loyalty, profits, and growth. According to The New York Times, “[He] put loyalty economics on the map.” The Economist refers to him as the “high priest” of loyalty. And 1 to 1 Magazine calls him, “the undisputed king of loyalty.” He is the author of other books (notably The Loyalty Effect and Loyalty Rules!) and seven Harvard Business Review articles on loyalty.
I conducted this interview in 2008 for KL@TG magazine, published by Dallas-based Thomas Group. Obviously, Reichheld’s responses remain rock-solid.
Morris: During recent years, there seems to have been a significant decline of loyalty between companies and their employees, and even between and among those who work for the same company. Do you agree? If so, how do you explain this?
Reichheld: Sadly, most employees now believe that loyalty to their employer will get in the way of their personal success. The same is true for customers; most believe that loyalty to their supplier is a sure route to lousy value and lackadaisical service.
Morris: Perhaps as one result, companies seem to have more — and more serious — problems retaining their most valued people. In your opinion, what must be done to reduce (if not eliminate) the problem?
Reichheld: Leaders have to be clear about the value of loyalty—and they have to define what it is. Too many workers presume that loyalty is synonymous with long tenure—but this is also true of dead wood. People with low ambition, people who are obedient, these are not the role models most talented workers aspire to emulate. The only kind of loyalty that makes sense for the company and the employee is the loyalty defined by people’s desire to invest in a better relationship, one that is mutually valuable and is founded on ethical behavior consistent with the Golden Rule.
Morris: Now let’s shift attention to The Loyalty Effect that you co-authored with Thomas Teal. When you and he were completing your research for this book, were there any head-snapping surprises?
Reichheld: I was initially startled by the economic leverage in most businesses generated by small improvements in customer retention rates. Our discovery that a 5% increase in retention yields a 25 to 100% increase in profits was a big surprise. I will admit that I was a skeptic until we saw this time after time across a broad range of businesses.
Morris: Its subtitle refers to a “hidden force.” During the decade since this brilliant book was first published, has this force become less hidden?
Reichheld: Most managers now seem to accept the fact that loyal customers drive growth and profits. However, very few can do the math to quantify the precise value of customer loyalty—and therefore, most companies still under resource this objective in favor of short-term profits.
Morris: In Loyalty Rules!, you recommend six “bedrock principles”: preach what you practice, play to win-win, be picky, keep it simple, reward the right results, and finally, listen hard…talk straight. Of the six, which seems even more important now than ever before? Why?
Reichheld: Reward the right results is probably the one that I now understand better, and believe holds the key to improvement in many companies. The right result is turning customers into profitable promoters—and this should drive rewards for most employees and executives.
Morris: At one point in The Loyalty Effect, you and your co-author, Thomas Teal, observe: “One common barrier to better loyalty and higher productivity is the fact that a lot of business executives, and virtually all accounting departments, treat income and outlays as if they occurred in separate worlds. The truth is, revenues and costs are inextricably linked, and decisions that focus on one or the other — as opposed to both — often misfire.” For those who have not as yet read The Loyalty Effect, can you please expand on that observation?
Reichheld: Accounting numbers provide a very useful tool for managing a business, but we must remember that these numbers are fictions—artificial constructs that simplify and model the true economics at work in a business. When people are organized into units that simplify accounting (e.g. cost centers and revenue centers) they have a hard time focusing on the true objective: turning more customers into profitable promoters.
Morris: Now let’s shift attention to your second book that was published in 2001. Its initial title was Loyalty Rules! but the exclamation point was deleted when the paperbound edition appeared two years later. Why?
Reichheld: Punctuation marks at the end of book titles are simply too awkward—and I chose to simplify. Most readers still pick up on the triple entendre: the rules that comprise loyalty, loyalty measures success (like a ruler), and loyalty rules (like loyalty “rocks”).
Morris: In Loyalty Rules!, you suggest that companies with faithful employees, customers, and investors (i.e. capital sources which include banks) share one key attribute: leaders who stick with six “bedrock principles”: preach what you practice, play to win-win, be picky, keep it simple, reward the right results, and finally, listen hard…talk straight. If you were writing this book today, would you revise, add to, or delete any of these six principles?
Reichheld: The six principles have not changed at all. What I have come to understand better is that I was simply parsing one rule (The Golden Rule) into practical components—and that there is not a magic number of divisions.
Morris: With all due respect to the importance of “zero defections,” is it not reasonable to expect to lose at least some valuable people if only because there really are much better career opportunities for them elsewhere?
Reichheld: Just because someone leaves does not make that person a defector. If they continue to sing your praises and recommend to friends and family that your firm is a great place to work—you cannot consider them defectors.
Morris: Why are so many (if not most) customer feedback initiatives inadequate?
Reichheld: Getting honest, candid feedback takes hard work, and most firms don’t recognize this reality. They just presume 10% response rates are adequate—and ignore the fact that the loudest feedback is coming from the fact that 90% of you customers will not give you the time of day. Because so many firms fail to follow up on feedback (and alert the customers that their precious time has been well spent) so fewer and fewer customers are willing to invest time in additional surveys.
Morris: In The Ultimate Question, you examine many of the same core principles as in your previous books. However, it seems to be quite different from them in significant ways. Is that a fair assessment?
Reichheld: That book is a natural extension and continuation of my work on the importance of loyal relationships—but I agree that is different in that is not only provides a more practical metric, it speaks to the raison d’etre for any business (or community). It offers a radical proposition about the way we should measure success. The book makes a rather bold assault on the shortcomings of “profits” as the dominant metric for guiding our economic institutions.
Morris: When companies embark on process improvement initiatives, they heavily rely on metrics. Based on your own experience, how does measurement of customer perceptions differ from measurement of the production of, for example, consumer products?
Reichheld: Getting people to respond candidly and accurately to a survey presents a much greater challenge than measuring defect rates on an assembly line. Imagine the dentist just about to begin drilling—and pausing to ask the patient: “By the way, I wondered how likely you will be to recommend me to a friend?”
Morris: As you explain in The Ultimate Question, the Net Promoter® Score (NPS) enables companies to differentiate between good profits (created by increasing customer value) and bad profits (earned at the expense of customers). Here’s my question. Can NPS be of substantial benefit to almost any organization, regardless of size or nature?
Reichheld: I have found that hospitals, schools, and churches find NPS to be just as compelling and practical as business organizations such as GE, American Express and Intuit. Every successful organization needs to create a community of relationships that are worthy of loyalty so that members will invest their time, energy and creativity. This investment is the fuel for true growth.
Morris: One final question. Any thoughts about your next book? That is to say, where will your restless curiosity about the business world take you next?
Reichheld: I am sure I will write a book about NPS for employees, and there may be another book in the interim that tracks the challenges and successes encountered by the firms who have decided to roll out NPS as a core metric. Senior execs at GE view NPS as their next “six sigma”—and I look forward to reporting on their progress.