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    Prescription For Cutting Costs: Loyal Relationships

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    Paulina M. Sánchez
    Building loyal relationships with customers and other stakeholders can help companies significantly cut costs. Customers who remain loyal over time tend to purchase more, which reduces the operating costs to serve them. They also refer other customers. Companies can identify the subset of customers with high potential for long-term, profitable relationships and focus their investment on building relationships with those customers. Building loyalty also reduces costs by creating stable, long-term relationships with employees, suppliers, and other partners. Loyalty leaders develop careful annual evaluations of relationships and identify underperforming partners to provide assistance in improving.

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    Prescription For Cutting Costs: Loyal Relationships

    Uploaded by

    Paulina M. Sánchez
    305 views3 pages
    Building loyal relationships with customers and other stakeholders can help companies significantly cut costs. Customers who remain loyal over time tend to purchase more, which reduces the operating costs to serve them. They also refer other customers. Companies can identify the subset of customers with high potential for long-term, profitable relationships and focus their investment on building relationships with those customers. Building loyalty also reduces costs by creating stable, long-term relationships with employees, suppliers, and other partners. Loyalty leaders develop careful annual evaluations of relationships and identify underperforming partners to provide assistance in improving.

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    Building loyal relationships with customers and other stakeholders can help companies significantly cut costs. Customers who remain loyal over time tend to purchase more, which reduces the operating costs to serve them. They also refer other customers. Companies can identify the subset of customers with high potential for long-term, profitable relationships and focus their investment on building relationships with those customers. Building loyalty also reduces costs by creating stable, long-term relationships with employees, suppliers, and other partners. Loyalty leaders develop careful annual evaluations of relationships and identify underperforming partners to provide assistance in improving.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    305 views3 pages

    Prescription For Cutting Costs: Loyal Relationships

    Uploaded by

    Paulina M. Sánchez
    Building loyal relationships with customers and other stakeholders can help companies significantly cut costs. Customers who remain loyal over time tend to purchase more, which reduces the operating costs to serve them. They also refer other customers. Companies can identify the subset of customers with high potential for long-term, profitable relationships and focus their investment on building relationships with those customers. Building loyalty also reduces costs by creating stable, long-term relationships with employees, suppliers, and other partners. Loyalty leaders develop careful annual evaluations of relationships and identify underperforming partners to provide assistance in improving.

    Copyright:

    © All Rights Reserved
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    of 3

    Prescription for

    cutting costs

    By Fred Reichheld Loyal relationships

    In the current downturn, many companies are tightening belts. But


    too many are missing their biggest opportunity to keep costs down:
    building loyal relationships with customers and other stakeholders.

    How do loyal relationships translate into cost savings? Consider


    the cost of serving a long-standing customer versus the cost of
    courting one. Across a wide range of businesses, customers generate
    increasing profits each year they stay with a company. In financial
    services, for example, a 5% increase in customer retention produces
    more than a 25% increase in profit. Why? Return customers tend
    to buy more from a company over time. As
    they do, your operating costs to serve them
    Chick-fil-A has so effectively
    decline. What’s more, return customers refer
    mastered the economics of
    others to your company. And they’ll often
    loyalty it can afford to pay
    pay a premium to continue to do business
    store operators double or
    with you rather than switch to a competitor
    triple its industry’s average
    with whom they’re neither familiar nor
    compensation and still give
    comfortable. Of course, not every customer
    10% of profits to charity.
    has potential to be profitable and long-standing.
    Cost-effectiveness dictates that you segment
    clients to identify the subset that holds this potential, so you can
    target your investment in relationship-building.

    Fred Reichheld is a fellow of Bain

    & Company, and author of Loyalty

    Rules! How Today’s Leaders Build

    Lasting Relationships, Harvard

    Business School Publishing,

    September 2001.
    Consider the case of Vanguard, the mutual fund
    industry cost leader. When Jack Brennan took over Loyalty leaders develop annual report cards
    as CEO in 1996,Vanguard’s flagship S&P 500 Index on suppliers and dealers with as much care
    Fund costs were just 0.20% of assets. By 1999, they as they give to annual reports for investors.
    had declined to 0.18%—a 10% improvement. One
    of the reasons is that Brennan, like his predecessor, measures including sales, sales growth, and profits.
    John Bogle, is committed to customer retention. The stores whose performance falls into the bottom
    And Brennan’s particular passion is selecting the 15-20% of all Chick-fil-A units automatically get
    right kinds of customers up front—the kinds with extra attention from company consultants. Customer
    high potential for long-term relationships with the survey frequency is doubled, and improvement plans
    firm. For example, a few years back,Vanguard are developed with each operator. Operators and
    rejected an institutional investor that tried to invest employees receiving the added scrutiny understand it
    $40 million in a fund, because Vanguard suspected is meant to help them get back on track; they know
    that the customer would soon churn the investment, that long-term relationships require honest, two-
    creating extra costs for all the existing customers. way communications and learning, and they value
    The customer complained to Brennan, who supported the company’s commitment to that goal. The
    the decision and used it as an opportunity to ultimate result, of course, is a dramatic saving in
    underscore the need to be selective about customers. hiring costs; Chick-fil-A’s average store operator
    Loyalty leaders also reduce costs by building trusting turnover rate is 5% versus the competition’s 35-40%.
    relationships with employees. Consider Chick-fil-A, Customers, employees, suppliers, distributors,
    a chain of quick-service restaurants that has so channel partners—almost every stakeholder in your
    effectively mastered the economics of employee company is a potential cost-reduction crusader.
    loyalty that it can afford to let store operators earn If you facilitate a supplier’s operations by being
    compensation that’s double or triple industry averages, flexible about delivery times, for example, that
    while generating enough cash to grow the chain supplier might be more willing to flex for your
    and give about 10% of profits to charity. Those special need. And over time, as you build trust, that
    compensation standards help grow loyal employees supplier will likely be loyal to you even if one of
    who nurture attractive client relationships. your competitors offers a more attractive short-term
    Performance feedback, too, bolsters loyalty. Every contract. You’ll both save on switching costs; and
    store operator can easily find out (right on the in- if you’re attentive, you’ll maximize the efficiency
    store computer) his or her standing in comparison of your transactions as your relationship matures.
    to the other 600 or so Chick-fil-A operators on

    B a i n & C o m p a n y, I n c . Prescription for cutting costs: Loyal relationships 2


    What are the secrets of the loyalty leaders? Identify ways to help underperformers:

    Develop annual relationship report cards on


    The companies that best understand cost savings
    suppliers and dealers (and customers and employees)
    through loyalty take very deliberate steps. A few
    with as much care as you give to annual reports
    you might consider:
    for investors. Test a 360-degree feedback system,
    Modify customer-a
    acquisition incentives: starting with senior managers and rolling out to
    Reward your sales teams and marketing channels all employees.
    for acquiring customers that stick. Consider
    Use the Internet:
    commission or bonus reductions if customers
    Loyalty leaders such as Vanguard have shifted
    defect before 18 months.
    almost half of their customer transactions to the
    Reallocate marketing investments: Web. Make sure your Web site is so simple to
    Systematically rank all of your customer use that many customers will prefer this faster
    acquisition campaigns on the basis of their and cheaper alternative.
    yield of loyal customers. Shift resources towards
    No company is immune to the pressures of the
    programs that attract the richest mix of loyal
    market. But companies that focus on building
    customers. (Many firms today are wasting half
    loyal relationships that by their very nature keep costs
    their marketing expenses on disloyal customers
    to a minimum are far better positioned to remain
    who will never stick around long enough to
    strong in the face of market turbulence.
    pay back the acquisition investment.)

    BAIN & COMPANY, INC.


    Corporate Headquarters
    Two Copley Place
    Boston, Massachusetts 02116
    1 (617) 572 2000

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