Financial Post: Briefing When businesses abuse customer loyalty -- and two-thirds of them do, an eminent management authority said -- "they embarrass their employees and lose employee trust and respect."
"Most of the companies I deal with take advantage of loyal customers with mediocre service and inflated prices," said author Frederick Reichheld, Director Emeritus and Fellow at Bain & Co. Bain is a Boston-based consulting firm that helps companies deal with mergers, acquisitions, revenue growth and loyalty. Judging by his published writings, Reichheld often tells clients what they don't want to hear: "Corporations have their employees asking, 'What kind of company are we if we are not acting in the best interests of our most loyal customers?"'
He cited a phone company that gives "the worst deal" to its longest-term customers, then "subsidizes defectors and new customers with the best deal at the expense of the loyal customer." Or the airline that offers infrequent fliers the lower advance ticket price "while frequent business fliers pay ridiculously higher fares."
Even as their sales plunge, chief executive officers of these firms fail to recognize the critical link between treating customers ethically and inspiring staff trust, Mr. Reichheld wrote in The Loyalty Effect, published in 1996.
The same anything-to-make-a-buck scheming has them seeking "ways to pay employees less or actually get rid of them, especially those with the greatest experience and the highest compensation."
In that book he noted that when one corporation rated its stores on loyalty and productivity, it found that the top third in employee retention were also in the top third of productivity. Their sales were 22% higher than stores ranked in the bottom third, based on loyalty. Again, a fast food chain discovered that its outlets with low staff turnover "had profit margins that were more than 50% higher than stores with high employee turnover."
On average, corporations "now lose half their customers in five years, half their employees in four, and half their investors in less than one," Mr. Reichheld said. Yet, an increase of 5% in customer retention rates will pump up profit by anywhere from 25% to 95%, the business strategist added.
Short-sighted firms also "usually limit the upside of rank-and-file bonuses," Mr. Reichheld said, ensuring that "star performers will be encouraged to defect, while the dead wood continues to decay at the company's expense."