No. 460, August 12, 2002

Profitable relationships in business

Is the purpose of business to maximize profits? Or is the purpose of business to do good for customers, employees, partners and suppliers? No matter what personal opinion we might have it is the latter point of view which generates the big profits according to Frederick Reichheld in his new book Loyalty Rules!

Create the highest long-term profits by making everyone involved in a business a winner. This is Reichheld’s thesis which he supports with research and examples from internationally well known companies such as Harley-Davidson, Cisco Systems and Dell Computer but also lesser known American companies like Southwest Airlines, Chick-fil-A (fast food restaurant), Enterprise Rent-A-Car, software company Intuit etc. By building long-term loyal relationships with everyone involved it is possible to find the perfect niche, reduce costs and increase both quality and service.

Loyalty is the best measure for the quality in your business relationships, according to Reichheld. Only openness, trust and honesty can create loyal relationships sustained through thick and thin.

Many economists hold the view that loyalty is an old-fashioned concept. Nothing could be further from the truth, according to Reichheld. Loyalty is more important than ever. Profitability within e-commerce is impossible without loyal customers and employees. The elusive nature of e-commerce requires even higher trust.

Here are some key points from Reichheld’s work:

• To only measure profits is at best an ineffective and at worst a destructive way of managing a business. A better way to measure the effectiveness of a business is to measure customer loyalty, the number of customers retained by the end of the fiscal year.
  
  
• Finding new customers is expensive, especially in e-commerce. It is cheaper to sell more to existing customers. Customers who feel they are getting true value stay ? and recruit new customers.
  
  
• One cannot ask for loyalty, one can only earn it through ones actions. Honesty and openness are paramount. There are no short cuts. Loyalty takes a long time to earn but can quickly be lost.
  
  
• The paradox is that a long-term profitability can only be attained if the relationships with everyone involved – employees, suppliers, customers, unions, and others – are given higher priority than short-term profits. Thus the ability to build long-term loyal business relationships become the most important leadership quality.

If you want more depth on this, Loyalty Rules! has a lot to offer. To a CEO, entrepreneur or stock broker the book should give a great return on the investment in both its price and the time to read it.

Best of luck! Jonas Himmelstrand

Part one of this article with book information can be found at www.stratletter.com/460eng.html

© 2002 Strategies to Learn & Grow Newsletter • Printable version