Management based on loyalty, which aims at retaining customers and employees in order to improve profitability, goes beyond the typical customer satisfaction surveys. The success of this strategy is based on understanding that satisfied customers are not necessarily loyal. In all strategies based on loyalty, the goal of Marketing must aim at “zero desertion”, and it is possible to measure it in terms of cash flow, given the close relationship between loyalty, value, and earnings.
Until very recently, Marketing was the driving engine of businesses, the discipline that combined the company’s functional areas in order to satisfy the customer’s needs. It was understood that it played a key role in the company’s success. Today, Marketing departments all over the world are struggling to survive with less corporate stature and less personnel, because job cuts are aimed at those who cannot prove their worth to corporate earnings.
What is Marketing’s role? Some departments have thought of their role as customer service; others develop customer satisfaction surveys, and there were others that turned to promotional devices or direct mail programs. However, job and budget cuts continue to occur. Its decline is a regrettable fact, because Marketing is truly the essence of the forces that mobilize companies’ success and earnings. Our work proves that the most successful companies are those that cultivate loyalty – of customers, employees, and investors. The true enemy of earnings is the rotation of people, which is seen in customers very sensitive to price, employees that change jobs, and speculators who are looking for easy earnings.
From this perspective, the fundamental task of Marketing must be to develop customer loyalty, for which it must fully comprehend the relationship between the loyalty of customers, employees, and investors. And in order to be effective, Marketing people must incorporate loyalty into the context of the company’s mission.
The traditional line of thinking is that the company’s purpose is to maximize the value that stockholders perceive. However, this simplistic vision is incomplete – and the pursuit of this single goal can destroy a business.
A company’s true mission must be to create value for the three key components of a business system: customers, employees, and investors. The process of creating value for these three components is the essence of all successful projects, because it justifies their existence. Each component contributes time, money, energy, and technical knowledge, and in order to achieve success, the company must generate even more value in exchange.
Profitability is maximized by creating and assigning value with the objective of minimizing rotation in the business system, because the learning and confidence necessary to sustaining the creation of value cannot survive in an unstable, high-rotation system. The loyal employee learns over time how to attend to the customer, and the loyal customer learns how to access the business system in order to facilitate the service they receive. The loyal stockholder learns to anticipate the ups and downs of the business, and does not encourage behavior that destroys value in the long-term in order to assure short-term earnings. A successful business is actually a society made up of customers, employees, and investors. Just as with any society, a company’s activities must be mutually beneficial, because otherwise, it will end in failure. When any of the participants are left out, the system crumbles.
Even though all three components must be well attended to, the customers are the ones who should be considered as the “first among equals”, because customer loyalty is something to be earned every day and, of the three groups, it is the most slippery: customers generally have a minimum of emotional and financial capital invested in the company, and they can go elsewhere with little effort.
Although accountants’ cash flow states usually survive this transcendental fact, the truth is that cash flow originates in the customer’s wallet. Marketing faces the challenge of feeding this loyalty spring by assuring that the company attracts the proper customers – whose loyalty can be obtained and preserved – and that customers always receive a superior value from the company. This is the task that puts Marketing at the center of the process of creating value and generating cash flow.
However, Marketing people usually do not have the appropriate tools to carry out this task. Their measurement system ignores cash flow, concentrates on variables such as market share or satisfaction quotas, and is very much behind the financial accounting systems that look for the value created for investors. Accounting measurements influence the majority of company decisions, and given the fact that accounting ignores many of loyalty’s economic consequences, value has been systematically taken away and sub-administered.
Although corporate mission statements claim high-reaching goals such as “offering the best value to the customer” or “offering the best work environment”, the existing measurement systems are inadequate for gauging the value being given to customers and employees. The result: capital markets, which should be governed by long-term interests, are driven by the opposite forces.
Some Marketing experts saw what “zero defects” did for manufacturing, and understood that “measurement equals management”. So it was natural for them to turn to satisfaction surveys. These tools offer measurable results, and are based on well-known market research techniques. However, if everything is limited to measuring satisfaction, the results obtained over time will be unsatisfactory.
However, customers who claim to be satisfied are not necessarily loyal. How can that be? In the majority of companies, between 60 and 80% of customers who left said they were “satisfied” or “very satisfied” on the survey previous to their abandonment. In the time between one thing and another, something can happen, and quite often it does: competitors change their offers, the customer has new requirements and begins to look for alternatives, or other unknown factors intervene.
Measuring satisfaction is deceptive because it means putting effort into measuring a mental state, when what is really important is behavior. Retention measurements such as the annual retention index, purchase frequency, and customer participation in the portfolio point to the true objective: does the customer’s behavior show that he or she is convinced they should continue participating in the company? Does he or she really buy the company’s value proposal? That is, will they have to come back to continue buying?
As costs drop and revenue rises, earnings also increase as a third effect of loyalty. This offers the resources to invest in higher employee compensation and in new activities that improve the value the customer perceives. Earnings and growth drive the stockholders’ value and reduce the cost of capital, improving in this way the company’s ability to offer value.
Although loyalty is a noble behavioral pattern in the majority of aspects in human life, its importance in business goes beyond altruism.