Slashing Costs with Customer Loyalty - Case Study Example

Introduction Frederick Reichheld has received substantial attention from the marketing industry, as he has been regarded as the "father of loyalty", due to his work of reinforcing the optimal value of loyalty in an organizational setting (Andrews, 1999). He saw the perspective of loyalty as a crucial factor in the premise of investor, employee and customer retention. He also presented that loyalty can be associated with value and profits. His works has been recognized since 1990. However, he has not been integrated in the academe of marketing research, despite of his premises works being utilized by large corporations (Abraham, 2009). In that regard, the researcher intends to identify whether the works of Reichheld bear meaning or they are simply works of a marketer. This paper would contain an assessment of one of Reichheld’s articles in regards to a study he conducted, and relate this to academic literature relevant to marketing. Frederick Reichheld - Overview The Bain and Companys loyalty practice is founded by Fred Reichheld. The loyalty practice is designed to assist firms in attaining their organizational objectives and producing sustainable outcomes which can be achieved through an enhanced consumer and employee loyalty. Reichheld joined the company in 1978, whose duties encompass leadership activities, mainly concerning the context of Vompensation and Nominating and Management committees across the globe. He eventually became the first Bain fellow of the company in 1999. Being a Bain fellowed allowed him to delve into research and writing while being employed in the firm. In line with Reichhelds work, he was able to associate the connection between loyalty and profit through studying retention on the end of the customers and employees (Reichheld, 2011). He is also known as the author of bestselling books with the Harvard Business Review Press, which are as follows: (1) The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value; (2) Loyalty Rules! How Todays Leaders Build Lasting Relationships; and (3) The Ultimate Question. Some of his works include the NetPromoter framework, which was introduced in his book "The Ultimate Question". The NetPromoter framework has been utilized by various large corporations, which includes General Electric, Apple and American Express, to name a few. Apart from being an author, Reichheld is also a renowned speaker among various major business forums. In fact, Reichheld has been awarded as one of the 25 most influential consultants by the Consulting magazine in the survey they have processed in 2003. Reichheld educational background is rooted from Harvard College and Business school, in regards to his bachelors degree and masters degree in Business Administration (Reichheld, 2011). He has also been quoted in several marketing papers, such as The Economist, 1to1 Magazine, and The New York Times, wherein he had received high regards as the echelon of the context of loyalty. The topics relevant to Riechhelds discussion is whether the context of loyalty would prove significant on the case of economic turmoil, and as to why employee layoffs imply the significance of loyalty among the workforce. Reichheld had discussed the present situation wherein employees do not place value on customer loyalty, and as to how retaining customers is tantamount to profitability. Other issues that Reichheld tackles is the loyalty measures among firms and the concept of Customer Relationship Management (CRM) (The Economist, 2001). Loyalty Acid Test – The One Number that You Need to Grow An example that the researcher would like to assess is the study conducted by Reichheld at Satmetrix, entitled the "Loyalty Acid Test". The study employs a survey tool that has been administered to thousands of people garnered from public lists. Four thousand participants were recruited and was asked to provide a purchase history, and were inquired whether they referred the company in which they purchased in to a colleague or friend (Reichheld, 2003). If the participant didnt have referral data, the researchers who have conducted the study waited for six to twelve months to ask the participants the same questions. With the data gathered by the methodology procedure, Reichhelds team was able to come up with fourteen case studies, all of which are supported with ample data that enabled statistical analysis. With the studies conducted, the researchers identified which survey questions are more significantly relevant in accordance to consumer referral or repeat purchase (Reichheld, 2003). Based on 11 out of the 14 case studies, the best question culled was "the willingness to recommend". In that regard, Reichheld surmises that utilizing this singe question sounded better with the respondents as opposed to conventional theoretical questions used in regards to a company worthy of its customers’ loyalty. Focusing on that question alone, the researchers designed a response scale that would be utilized. A scale of one to ten, which ranges from “extremely likely” to “not at all likely”, had been applied. Three clusters were then found, which were evaluated through performed cluster analysis. Basically, promoters of the company’s product would choose a score of 9 or 10, whereas customers who are passively satisfied would choose a 7 or 8 score. On the other hand, deemed detractors would score the question with 6 or below (Reichheld, 2003). The next step of the study involved identifying whether the groups are capable of projecting growth rates in the industry. The recommendation survey was then administered to thousands of respondents from public lists, which were then compared to the actual results of the growth rates of various firms’ revenues. The conclusion of the study is that there was no company that was able to increase its growth without actually shifting its ratio of promoters to detractors (Reichheld, 2003). This study had been elaborated on Reichheld’s article “The One Number You Need To Grow”. In the following paragraphs, the researcher shows the good and bad points of the article in line with academic marketing literature. Assessment Reichhelds work pertaining to his article "The One Number You Need to Grow" in the Harvard Business Review and further elaborated in his book "The Ultimate Question" focuses on the premise of the net promoter score. From the title of the article alone, Dr. Fred Van Bennekom, had criticized that the title the Reichheld incorporated is vague as it cannot be associated well with the context of the research he presented. According to Van Bennekom, Reichheld explained in his research that in any business, there is more than one number that they need in order for a business to develop. The article begins with Andy Taylor, CEO of Enterprise Rent-A-Car, discussing the companys means of measuring and manage customer loyalty sans the intricacy of conventional customer assessment. In that regard, Enterprise utilizes a survey tool that employs two questions, which are: (1) What is the quality of the customers rental experience; and (2) would they rent from the company again. At a glance, one can note that this measure is simple and it would provide immediate feedback. The research indicated that the survey instrument used by Enterprise garnered a high response rate. This same survey is being utilized for ranking the companys branch offices on the basis of the customers experience in regards to the highest rating preference (Reichheld, 2005). According to Reichheld, this approach helps the business to promote its branches to the extent that customer satisfaction would be achieved wherein the consumer feedback would be regarded as the key driver of company in line with the business profitable growth (Reichheld, 2005). This premise had been affirmed by Van Bennekom that a high response rate of customer satisfaction implies a high probability of repeat business and viral marketing. With this premise, Reichheld had formulated a research that would help him identify whether the ideology implemented by Enterprise in its business is viable in profit growth and can be applied in various industries. Reichheld was able to conclude that a single survey question is a pragmatic tool for projecting business growth, wherein this question must be in line with the customers willingness to recommend a specific product or service to other people (Reichheld, 2005). The study conducted was able to identify that the answer to this question is related in the variance of the growth rates among competing firms. In that light, one can note that the context of customer loyalty is vital for a business growth (Anand & Khanna, 2000). Van Bennekom, who has earned a doctorate degree in Business Administration and hold Survey Design Workshops affirmed to the result of the study conducted by Reichheld, however, he states that the question concerning a persons willingness to recommend a product or service must be phrased in a correct manner, in a way that it would be perceived as a hypothetical question rather than a command (Van Bennekom, 2010). In Reichhelds study, he used "How likely is it that you would recommend [company] to a friend or colleague?” In spite of the question weighing as viable measure in ascertaining a business profit growth, it turned out in the study that it is not applicable in certain industries. To further elaborate on the study, Reichheld noted that the factors concerning consumer retention and consumer satisfaction are deemed viable predictors of a business profitability (Reichheld, Allen, and Hamilton, 2005). However, the same results are not directed towards the companys growth. It is also important to note that these surveys are not accurate, in the sense that dissatisfied customers might still choose to be with the same company, although they would not be inclined towards recommending it to others (Reichheld and Rigby, 2002). In addition, dissatisfied customers would most likely not complete a survey if the only question shown is the likelihood of recommending the product or service to other people. In that regard, Van Bennekom contests Reichhelds statement that customer retention is not tantamount to growth, as based on the concept of Customer Relationship Management, retaining customers is an important factor for the growth of the business. A companys growth strategy can then be formulated through rectifying the business core problems and of course, measuring consumer retention (Van Bennekom, 2010). In the research, Reichheld mentioned the disparity between the relationship of the garnered customer satisfaction surveys and the business growth or profit (Reichheld and Schefter, 2001). Van Bennekom states that one factor that Reichheld failed to include in his study is to include and evaluate the influence of external factors to survey tools. On an important note, dealers and sales people are the ones who asks customers to fill out the survey, wherein they apply their "sales" skills to encourage these people to give high scores. In that light, not all industries can use satisfaction measurement systems as the data produced are poorly collected, thus inconclusive (Van Bennekom, 2010). With the article "One Number You Need to Grow", Reichheld promotes the new style in provisioning customer surveys. This new approach implies a survey that has only one question, which he claims that the results of which to be utilized by businesses and focused on by employees in motivating growth. With that, Reichheld concludes that a simple survey as such is the most ideal option, as a single measure dependent on an industry is more pragmatic as compared to a comprehensive and involved survey. He claims that this approach allows an objective that is practical, clear-cut and encouraging. This result alone, is not conclusive. Van Bennekom contests Reichhelds conclusion. He states that the survey approach offered by Van Bennekom is far from being actionable, let alone productive(Van Bennekom, 2010). Reichheld believes that a consumers opinion pertaining to their willingness to recommend a product or service cannot be attributed to a business growth, as it can only be deemed as a predictor that is closely related to growth (Reichheld and Schefter, 2001). However, the concept of marketing implies that the two factors, which are revenue growth and the customers willingness to recommend, can be associated with the experiences of a customer when using a companys products or services, regardless if its positive or negative. In that regard, one can note that both factors originate from a customers experience (Armesh, Rasoulzadah, Kord, Salarzehi, and Saljoghi, 2010). In order for data to be actionable, a business must identify where measures must be applied with corrective action when the companys objectives are not attained. Surveys are not only provisioned for the sake of identifying whether a company would attain revenue growth or not (Caruana, 2002). Employing the one question survey proposed by Reichheld does not provide the company the information as to what factors that must be addressed in which corrective measures can be applied. Survey tools are data collection instruments that are meant to provide information that would allow the company to identify the good and bad points of the business, enabling them to improve upon those that need to be addressed. In that light, it is important that survey tools must have specific and actionable questions (Knox, Maklan, Payne, Peppard & Ryals, 2003). Actionable questions, backed up by detailed answers, would help businesses produce better corrective measures. These data would then allow the business to refine its processes. However, Reichheld eventually elaborated the survey system employed by Enterprise. Enterprise makes use of a survey through phone, and any complaints gathered are escalated to the concerned branch manager. The branch manager would then implement service recovery practices engaging the consumer, which would then be followed by measures that would help them identify the root cause and formulate and implement resolutions (Payne and Frow , 2005). In order for a business to grow and develop, the value of customer feedback is significant in projecting the business status on a macro level. At a micro level, the feedback system utilized by businesses must aim to isolate the origin of satisfaction and dissatisfaction. The information presented in this line item is crucial the status of the business on a long term business, especially in regards to in recovering and retaining dissatisfied customers and identifying root cause of problems and formulate resolutions. In conclusion, viral marketing or customer satisfaction is not keys to business growth- its continuously improving the business design, especially operational execution (Llusar, Zornoza, & Tena, 2001). The Academe Perspective On the perspective of Academe, customer loyalty is an integral part of any business. This premise had been supported by the concept of Customer Relationship Management (CRM). The objective of organizations to form and establish valuable relationships with the firm’s consumers is a must in every business. This fact has been highly stressed when considering competition, wherein the concept of customer loyalty plays a vital role in securing one’s market position. However, this factor is often being overlooked at by most marketers (Ryals & Knox, 2001). It seems that the trend that businesses follow is acquiring more consumers, instead of placing more emphasis on retaining existing ones. With that in mind, there is obviously a need to design methods and strategies that would allow organizations to surpass its competing firms, simply through tapping their market and earning the trust and loyalty of its customers (Thomas, Werner & Kumar, 2004). Customer relationship management is a strategy used by firms as a means to opt and manage beneficial and relevant relationships among its stakeholders, especially its consumers. Such type of strategy focuses on a customer centric organizational culture and principle that would maintain a business in terms of sales and marketing (Tsiotsou, 2006). Customer Satisfaction Customer Satisfaction is tantamount to Customer Loyalty. A customer would not continue to purchase or partake in any of a firms business if he is not satisfied with the experience he had with the company. On a technical perspective, customer satisfaction is one of the significant factors in marketing, which also serves as the key objective of every business. This factor is used to measure a customers consumption or purchase behavior (Caruana, 2002). Customer Loyalty Customer Loyalty is the correlation between a customers relative attitude and repeat business. This correlation is associated with the balance between situational and conventional factors. In that regard, customer loyalty can be attributed to ones behavioral, perceptual and motivational inferences. On the other hand, it is also important to note that the key driver that retains customers is their intent to repurchase from the same firm. Although a customers aim to recommend an item or a service is dependent on the level of satisfaction one has experienced in the transaction, it cannot be used solely to measure customer loyalty. It is also important to consider an individuals spending capabilities. Ones commitment to a product, service or company is dependent on the individuals tolerance towards the price of the product being purchased. As a customer grows loyal towards a product or a business, the amount of money they are willing to allocate in buying from the company would increase (Ryals & Knox, 2001). The probability of generating a positive experience among customers would imply a higher probability of the firm to meet and even exceed the expectations of its consumers based on their standards, which would then result to retention. In essence, the quality of service provisioned by a firm is a crucial construct in retaining customers, as well as in developing the value of the relationship between both parties (Llusar, et. al, 2001). Conclusion Based on the assessment of researcher by deconstructing one of Reichheld’s papers, identifying his background and analyzing the concept of customer loyalty in the academic perspective, the researcher concludes that Reichheld is simply a marketer with ideas. In addition, he has ideas that he is able to write, and circulate among the press. What Reichheld proposes can be found in any marketing journal or book upon close dissection, he was just able to present his thoughts and analysis on a more casual and contemporary manner. However, it is fair to cite that his ideas are of worth, as the concept of customer loyalty in which he stresses on is a really crucial factor in the field of marketing. His Harvard Business Review article “The One Number You Need to Grow” is bland as it was not substantially supported by related literature. It was commendable that Reichheld had conducted case studies to prove his theory; however, he failed to assess the real significance of using survey tools. The researcher believes that with Reichheld’s intent of modernizing marketing strategies by making it simpler, he lost sight of the conventional and important matters that gives substance to such strategies. He failed to grasp the importance of traditional approaches by attempting to introduce new marketing strategies. Reichhelds contributions focused on highlighting customer loyalty as a key driver in businesses. In provisioning service, he focused on the context that the most ideal means of maintaining and developing businesses are through maintaining consumers. He was able to disseminate his ideologies pertaining to his innovative marketing strategies through the journal articles and books that he wrote, including his talks in seminars. There are organizations who have made use of Reichhelds theoretical assumptions regarding marketing strategies, wherein the results were favorable. However, critics imply that his ideas are merely the same information one can acquire in marketing research, only with a more appealing package. The credibility of his works are valid, although the acclaim he has received has been heightened by the way in which he "marketed" himself to the public. One can call Reichheld as an "idea man", as he has merged his theoretical background of marketing with innovative strategies, in which he presents and shares to people. It is an exaggeration to regard him as a charlatan, as he merely markets his thoughts in a way that people would listen and understand. However, he cannot also be regarded as a "purveyor of truth", as what he preaches is similar to text-book information, wherein empirical studies of existing companies would present more substance. References Abraham, J. 2009. Slashing Costs with Customer Loyalty. European Conference Blog 2009. Anand, B.N., & Khanna, T. 2000. "Do firms learn to create value? The case of alliances". Strategic Management Journal, 21, pp. 294-315. Andrews, F. 1999. A Man of Words is Still Partial to One. The New York Times. Armesh, H., Rasoulzadah, H., Kord, B., Salarzehi, B., and Saljoghi, Z.S. 2010. Customer Relationship Management. American Journal of Scientific Research, 12. Caruana, A. 2002. Service loyalty: The effects of service quality and the mediating role of customer satisfaction. European Journal of Marketing, 36, pp. 811-28. Knox, S., Maklan, S., Payne, A., Peppard, J. & Ryals, L. 2003. Customer Relationship Management, Butterworth Heinemann. Llusar, J.C.B., Zornoza, C.C. & Tena, A.B.E. 2001. 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