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Customer Loyalty and Employee Rentention 05/05/2016

In his book The Loyalty Effect, Fred Reichheld notes that on average, U.S. corporations lose half their customers in five years and half their employees in four. On top of this, he shows that disloyalty at current rates has been shown to stunt corporate performance by 25 to 50 percent. That’s incredible! For any company looking for long-term growth and stability, such defection rates are simply unsustainable.

Creating loyalty, then, from customers and employees is obviously critical. Unfortunately, you simply can’t have loyalty from one without the other. Losing employees becomes a vicious cycle that can cause customer disloyalty, while losing customers can cause high turnover in employees. Consider Reichheld’s simple illustration concerning the tangible benefits of maintaining loyalty:

Imagine two companies, one with a customer retention rate of 95 percent, the other with a rate of 90 percent. The leak in the first firm’s customer bucket is 5 percent per year, and the second firm’s leak is twice as large, 10 percent per year. If both companies acquire new customers at the rate of 10 percent per year, the first will have a 5 percent net growth in customer inventory per year, while the other will have none. Over fourteen years, the first firm will double in size, but the second will have no real growth at all. Other things being equal, a 5-percentage-point advantage in customer retention translates into a growth advantage equal to a doubling of customer inventory every fourteen years. An advantage of ten percentage points accelerates the doubling to seven years.

Besides these considerations, what else about maintaining loyalty makes it so lucrative? Two things come to mind immediately. First, most businesses rely on customer referrals for continued success. In fact, it’s hard to imagine a business growing when there’s widespread consumer discontent with its service and offerings. Fortunately or unfortunately, the opinion of consumers can circulate in this day and age within a few seconds to literally millions of other prospects. But the real value of maintaining customer loyalty is that you always have a ready and willing pool of customer advocates for your products and services: and there isn’t anything more powerful than having your customers do your selling for you!

Second, there’s a natural relationship between employee loyalty and customer loyalty that’s often not fully appreciated. Stability within a company is tied to employee retention. Loyal employees provide a maturity and expertise that’s incredibly difficult to maintain with high turnover. We’ve all tried to get help from employees that clearly don’t have the history required to solve our problem. Everyone knows how frustrating this can be, and how it creates an overall negative perception of the company.

But the flip side to this is that companies that tend to have high customer retention also tend to have high employee retention. At least one reason for this phenomenon is that employees seem to feel their job has more meaning when the company can generate such enthusiastic customers, which in turn bolsters employee morale. It’s a circle often overlooked. And importantly, this cycle leads to higher productivity. As reported by Conley, the Gallup Organization found that a highly engaged employee and customer leads to 3.4 times more financial productivity. Impressive.

The moral? Loyalty is only dead for companies that foolishly think that success is maintained without such a focus. Creating an environment that inspires loyalty isn’t easy, but critically important, and in the end the surest way to guarantee financial success and long-term growth.

Joe Ambrose

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