How to earn your customer's loyalty.
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How to earn your customer's loyalty.

I call it the 10-10-10 rule. You spend $10,000 on your building, FFE and advertising to attract a customer. In 10 seconds, you drive her away with a bad service experience. And you wait 10 years for another chance to win her back. Service success, or failure, is predictive of your future sales and profitability. A terrific Harvard Business Review article explains the business economics in detail and I'll tell how you can get that article at the end of this column. For now, I'll use a simple example.

Take the average dry cleaning customer. The lifetime revenue stream from that customer can be $7,000. I say "can be" because a single bad experience can stop that revenue stream instantly. One rude employee can end the lifetime customer value before it comes anywhere near its true potential. That means one service delivery promise that's broken, and not made right, can mean a loss of $7,000 in future revenue.

Whatever you're selling, your profitability depends on maximizing the lifetime value of your customers, and that value is fully realized only when you earn the customer's loyalty. I define customer loyalty as: high return frequency, exceptionally high likelihood to recommend, and exceptionally high overall satisfaction.

In the battle for loyalty, franchisees start with some great advantages in the marketplace. You've got a concept known to work. You have a product with proven appeal, a business model that's proven profitable and an operations manual that's been put to the test. But can you create a customer experience that keeps customers coming back? That separates you from the competition? That transforms your customers into a volunteer sales force for your brand? If not, you're setting your sights way too low.

Why "good" means "vulnerable"

Service that's good, but not exceptional, is the silent enemy. The difference between "good" and "exceptional" is the difference between a customer who "might" buy from you again and one who will "definitely" buy from you again. And again.

Xerox's customer research proved a "highly satisfied" customer is six times more likely to buy again as one who is merely "satisfied." Prior to that discovery, Xerox was happy to see its customers rate their experience as either "satisfied" or "highly satisfied." Now Xerox sets the target at achieving "highly satisfied" ratings from 100% of their customers. In customer surveys with multi-unit operators, we find that customers who rate you a "5" on a 5-point scale are almost three times as likely to recommend you to their friends as those who rate you a "4" on a 5-point scale.

The probability of keeping your merely "satisfied" customers coming back is alarmingly low. You are not really their preferred choice, just an available choice. They are ripe for the picking by your competition because they are not loyal to you. That's why "good" means "vulnerable."

Building loyalty starts with a determination to deliver greatness at every customer touch point. That passion must extend from the highest levels of management to every frontline employee. If you're serious about winning loyalty, you must actively monitor and measure your customers' feedback. Finally, you must respond to that feedback quickly with service improvements.

Gary Loveman and Len Schlesinger are two former Harvard Business School professors who helped research and prove that there is a direct financial link between superior service experiences, customer loyalty, and financial performance. Today, Loveman is the CEO of Harrah's and Schlesinger is the vice chairman of The Limited. So these are not ivory tower guys. They practice what they preach. They named their business model "The Service-Profit Chain." At a high level, it works like this:

  • Profit and growth are stimulated primarily by customer loyalty.
  • Loyalty is a direct result of very high customer satisfaction.
  • Satisfaction is largely influenced by the value of services provided to customers.
  • Value is created by satisfied, loyal and productive employees.
  • Employee satisfaction results from high-quality support services and policies that empower employees to serve customers well.

It all comes together in those last two bullet points.

Engage employees

Customer loyalty is driven by employees. As a multi-unit leader, your direct influence on customers is small but your direct influence on employees is huge. Engage employees! Your success depends on cultivating not just a productive employee base, but a cohesive team of individuals who share your passion for the business.

How is that done? At Harrah's Casinos and Hotels, measurable customer satisfaction targets motivate employee efforts to win high marks from customers. A portion of employee compensation is linked to customer satisfaction scores as a "Performance Payout" so employees have an investment in achieving excellent service levels. Employees then also have a vested interest in the performance of the entire team in serving customers exceptionally well and winning their loyalty. Just as you do.

"The impact of the Performance Payout at Harrah's is huge," says John Koster, vice president, Hotel Operations at Harrah's Las Vegas. "Having an opportunity at the end of the quarter to pick up $200 is a significant thing. Employees are very interested in it, and the staff brags about it to employees at competitors' properties." Beyond monetary incentives, outstanding employees are recognized with special Chairman Awards and their names published in Harrah's annual report.

Management is also awarded incentives based on the positive improvement in customer service. In the Performance Payout Program, 25% of managers' annual bonus is tied to achieving loyalty-inspiring customer service goals.

Loyalty is your armor against the competition, and it gives you a clear path to realizing the lifetime revenue potential of your customers. Superior service experiences win loyalty. But only engaged employees deliver that level of service. To get a full rundown of ideas to evaluate your service strategy, go to and request the complimentary HBR article, "Putting the Service-Profit Chain to Work."

- Jack Mackey is vice president of Service Management Group. You may contact him at or 816-448-4556.

Published: March 2nd, 2005

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