Loyalty Truth

In my opinion, The Loyalty Effect remains the definitive book written on Loyalty Marketing. Authored by Frederick Reichheld of Bain & Company in 1996, it was required reading for the team at Frequency Marketing as we completed our Loyalty Marketing “basic training”.

Reichheld postulated that in order for a business to create loyalty related shareholder value, it must tackle initiatives in three areas: customer loyalty, employee loyalty, and investor loyalty. Translated to consulting-speak, his mandate directed companies to embrace loyalty on an enterprise level.

By permeating the organization with a loyalty based culture, interactions with employees, suppliers, and  investors could be optimized. Results would be manifested in Improved employee retention, more favorable supplier relationships, and financial gain for investors. From the customer perspective, the loyalty driven enterprise would represent a value proposition that would hold attention and become the tie-breaker in commoditized industries. In short, the loyalty based business should be more profitable.

As the US recession marches on, I can’t help but notice the stark contrast between the key points of advice in Reichheld’s book and the manner in which companies have governed themselves over recent years. Events of the past 6 months provide good examples of how corporate America is flunking the enterprise loyalty test:

1. Numerous brokerage houses and banks fall prey to the real estate bubble and subprime lending practices to find themselves being recapitalized through mergers, acquisitions, and government bail-out. In nearly every case, executives prospered and select bondholders were protected while suppliers and holders of common stock were wiped out.
2. John Thain is forced out as Merrill Lynch CEO following perceived mismanagement of communications surrounding a $15.31 billion 2008 Q4 loss. Prior to his leaving, Mr. Thain had accelerated executive bonus payouts at the firm and had lobbied for his own enormous bonus until the embarrassing greed was exposed in the press. Shares of Merrill Lynch steadily declined to a near vanishing point during Mr. Thain’s 15 month reign as CEO.
3. Card issuers including Citigroup, American Express, and others have diluted the value of their card reward program benefits over recent weeks, citing the need to reduce expenses in the current economic downturn. In a Jan. 13 article, the Wall Street Journal documented how changes to program rules, additional fees, and adjusted reward values combine to impact the value proposition.

It is said that adversity reveals the true character of a man. It is not a stretch to apply this logic to corporations.  Investing in consumer loyalty programs when times are good and cash is flowing is viewed as smart strategy. When tough times cause these programs to unwind or be diluted, the intent and sincerity of the entire effort is put in question.

Companies invested in customer loyalty should stay the course in the down economic cycle if they hope to emerge on the other end with brand equity in tact. Those that use the down cycle as an excuse to cut costs and retreat from a customer-centric orientation are inviting consumer skepticism and damaging confidence in their business.

Sometime soon, the economic doldrums will be a memory and consumers will spend again. At that time, the companies aligning themselves with Reichheld’s business model will see their shareholder equity outpacing the competition.