How to Build Customer Loyalty in an Internet World

by Edward Prewitt of CIO magazine

"ONE of the best things you can do with CRM technology is find out who your valuable customers are." —FRED REICHHELD, BAIN & CO.

If you really want customers to keep coming back, then toss out those glossy brochures from vendors looking to sell you the latest in CRM software. Customer loyalty does not stem from clever stratagems to collect every conceivable piece of data from customers and then cross-sell them something they don't want, says Fred Reichheld, Boston-based Bain & Co. director emeritus and Bain fellow who has studied the topic.

In fact, the very concept of customer relationship management is misguided, Reichheld argues. Companies shouldn't try to manage loyal customers, he says; long-standing relationships arise from trust gained over many transactions, and they are sustained by customers' belief that the company wishes to keep them around rather than drive them away.

"CRM is manipulation in too many cases. Companies are acting on information of customers against their interests—calling them at home at night, charging them at the highest price point [that CRM software shows they will pay]," says Reichheld, author of two books on loyalty, including Loyalty Rules (Harvard Business School Press, 2001). "Loyalty means listening to your partner, creating mutual satisfaction."

Customer loyalty seems like a quaint notion in the Internet age, when customers can search out lower prices and defect to competitors with a mouse-click. Yet Reichheld's research has found that in the faceless online market, customers yearn for trustworthiness more than ever. Give it to them and they're yours forever, he says. That kind of loyalty is immensely valuable: Reichheld's analysis shows that a 5 percent increase in customer retention rates results in a 25 percent to 95 percent increase in profits. Clearly, customer loyalty is too central to companies' fortunes to be left to the marketing departments alone. And with technology so important in determining retention—or customer disaffection, if technology is improperly used—CIOs have a role to play. "If I were a CIO, I would really want to start to influence customer data," Reichheld says. This influence can take two forms, he says: a redeployment of CRM software and the creation of entirely new metrics for customer loyalty.

Shooing Away Butterflies
CRM is not altogether awful, in Reichheld's view. It's just that, too often, the standard CRM practices lead to vexation or worse from customers, not loyalty. Not many people enjoy being inundated with telephone calls and mailings from a vendor and its marketing affiliates. There is a good and virtuous use of CRM, however. "One of the best things you can do with CRM technology is find out who the valuable customers are—those who are staying, not just any customer willing to accept your offer to switch [from a competitor]," says Reichheld.

CRM data can do more than tell your marketing department what to pitch to customers. CRM software can also be used to determine which customers are worthy of a sales pitch. This may sound counterintuitive to capitalists, but loyalty is a two-way street. "Companies should try to invest only in relationships where there's the potential for long-term value," Reichheld says.

What he calls butterflies—customers who jump from one promotional offer to another—do not create that potential. Such customers often don't even provide short-term value, in fact. Think of credit card customers who flit from bank to bank following a succession of introductory rates.

Instead, companies should invest their resources in courting "barnacles"—customers who are likely to stick around for many years, as long as they're treated right.

Once companies know who their best customers are, the real work begins—convincing them to stay forevermore. Dell Computer, for instance, uses CRM data to determine which customers have the greatest hardware needs and then provides extra value to that select group, in the form of free Web portals. Although Dell garners a great deal of valuable customer information from its sales transactions, which are largely conducted via the Web, the company abjures common practices such as selling customer lists to outside vendors. Instead, Dell has set up Premier Pages for thousands of its best customers. These customized, secure websites allow customers to check on order status, arrange delivery dates and troubleshoot problems through Dell's help desk. Many Dell customers, which tend to be large companies, use their Premier Pages to keep track of systemwide computer purchases for better asset management. "The Internet offers most businesses a rich set of possibilities for improving the customer lifetime experience, but few firms have matched Dell's initiative," Reichheld says in Loyalty Rules.

Gauging Customer Loyalty
IS groups are typically content to fulfill the data-gathering requests of other departments rather than create their own surveys. But if existing measures of customer loyalty are inadequate, perhaps it's time for CIOs to step up to the plate. Companies typically gauge how well they're serving customers by getting them to fill out satisfaction surveys. There's a far more effective way to measure satisfaction, Reichheld says: Rather than limit yourself to the fraction of customers willing to tell you what they think, track the percentage of customers who come back. Retention rates capture the real financial ramifications of whether or not a company is delivering high value to its customers.

Although less than 20 percent of companies track customer retention, a few use it to great effect, estimates Reichheld. USAA, a San Antonio-based insurance company, for example, has made customer retention the top metric for executive performance. USAA's budget submittals must address how they will maintain or improve customer retention. Not surprisingly, the company has one of the highest retention rates of any insurer in the world.

A second loyalty metric that CIOs should consider instituting for their companies is Reichheld's own Loyalty Acid Test, found at www.loyaltyeffect.com/loyaltyrules/index.html, which asks customers whether a company is worthy of their loyalty. The 25 survey questions capture how loyal customers are to a particular company and why. Reichheld benchmarked the acid test with several companies that his research has identified as "loyalty leaders," including Enterprise Rent-A-Car, Harley-Davidson, Intuit, L.L.Bean, Northwestern Mutual, USAA, The Vanguard Group and SAS Institute. Overall, 70 percent of their customers said these eight companies deserved their loyalty—compared with less than 50 percent of the customers of a representative sample of all U.S. companies.

While keeping customers happy makes sense on an intuitive level, Reichheld is at pains to stress that it is good business sense. "The question is, Is a company getting profits from employees and customers or at their expense?" he asks. If the answer is the latter, then CIOs do their company a painful but important service in revealing the extent of customer dissatisfaction.