Moves like this demonstrate a way of thinking that is radically different from the thinking of bad-profits companies. Airlines that dominate particular routes have repeatedly used their market power to raise prices, sometimes to levels that can only be described as price gouging. AOL alienated customers not just with those service failures and pop-up ads, but also by continuing to charge for minutes used and resisting a move to flat monthly fees. EBay could easily increase profits by boosting ad revenue—but management recognizes that lots of expensive ads would make the site less valuable to community members and possibly put small merchants at a disadvantage relative to large players.
This way of thinking also demonstrates a deep respect for the power of word of mouth in today’s economy. Just as detractors have a bullhorn for spreading their negative word of mouth, promoters have one for spreading their positive word of mouth. Promoters bring in new people. They talk up a company and burnish its reputation. They extend the company’s sales force at no cost. They make it possible for a company to earn good profits and thereby to create growth that is both profitable and sustainable.
This approach to customers boils down to a simple precept: treat them the way you would like to be treated. What’s surprising is that so many company leaders articulate it in exactly these homespun terms. EBay founder Pierre Omidyar literally says, “My mother always taught me to treat other people the way I want to be treated and to have respect for other people.”4 Other leaders invoke the Golden Rule as well:
Colleen Barrett, retired president of Southwest Airlines: “Practicing the Golden Rule is integral to everything we do.”
Isadore Sharp, founder and chairman of the Four Seasons hotel group: “Our success all boils down to following the Golden Rule.”
Andy Taylor, CEO of Enterprise: “The only way to grow is to treat customers so well they come back for more, and tell their friends about us. That’s how we’d all like to be treated as customers.” Taylor concluded, “Golden Rule behavior is the basis for loyalty. And loyalty is the key to profitable growth.”
A truly customer-centric company is one that lives up to the Golden Rule. Employees treat customers the way they would want to be treated if they were customers. That means avoiding bad profits entirely.
Bad and Good Profits: How Can Companies Tell the Difference?
“Loyalty is the key to profitable growth,” said Andy Taylor of Enterprise. That makes sense as far as it goes. But it raises as many questions as it answers. Most companies can’t even define loyalty, let alone measure and manage it. Are customers sticking around out of loyalty, or just out of ignorance and inertia? Are they trapped in long-term contracts they would love to get out of? Anyway, how can managers really know how many of their customers love the company and how many hate it? What practical gauge can distinguish good profits from bad?
Without a systematic feedback mechanism, after all, the Golden Rule is self-referential and simplistic, unreliable for decision making. I might think I’m treating you the way I would like to be treated, but you may strongly disagree. Where companies are concerned, satisfaction surveys often delude executives into thinking that their performance merits an A, while their customers are thinking C– or F. Business leaders need a hard, no-nonsense metric—an honest grading system—that tells them how they are really doing.
The search for that metric—the missing link between the Golden Rule, loyalty, and sustainable growth—turned out to be a long and arduous quest.
At Bain & Company, we began investigating the connection between loyalty and growth almost thirty years ago. We first compiled data demonstrating that a 5 percent increase in customer retention could yield anywhere from a 25 percent to a 100 percent improvement in profits. Later, we showed that companies with the highest customer loyalty (we labeled them loyalty leaders) typically grew revenues at more than twice the rate of their competitors.
Of course, not everybody was eager to learn about the mysterious loyalty effect, which explained how building relationships worthy of loyalty translated into superior profits and growth. The corporate generals at places like Enron and WorldCom couldn’t have cared less about treating customers right. Some Wall Street firms in recent years seem to have been ignoring customers in favor of racking up big profits through proprietary trading. But the vast majority of senior executives generally buy into the concept. After all, it doesn’t take a rocket scientist to see that a company can’t grow if it is churning customers out the back door faster than the sales force can drag them in the front.
Still, there’s a puzzle lurking here. Survey after survey demonstrates that customer loyalty is among most CEOs’ top priorities—yet the colonels, captains, and corporals in their organizations continue to treat customers in ways that ensure these customers won’t be coming back anytime soon. If the CEOs are as powerful as they are said to be, why can’t they make their employees care about customer relationships?
The reason, of course, is just what we alluded to earlier in this chapter: employees are held accountable for increasing profits. Financial results are what companies measure. Financial results determine how managers fare in their performance reviews. Trouble is, accounting procedures can’t distinguish a dollar of good profits from a dollar of bad. Did that $10 million in incremental profit come from new hidden surcharges, or did it come from loyal customers’ repeat purchases? Did that $5 million in cost reduction come from shaving service levels, or from cutting customer defection rates? Who knows the answer to any such question? And if nobody knows, who cares? Managers trying to run a department or division can’t be faulted for paying attention to the metrics by which they will be judged.
Whatever the CEO might think, in short, companies that measure success primarily through the lens of financial accounting tend to conclude that loyalty is dead, relationships are irrelevant, and the treatment of customers should be governed by what seems profitable rather than by what seems right. With only financial metrics to gauge success, managers focus on profits regardless of whether those profits represent the rewards from building relationships or the spoils from abusing them. Ironically, customer loyalty provides companies with a powerful financial advantage—a battalion of credible sales and marketing and PR troops who require no salary or commissions. Yet the importance of these customer promoters is overlooked because they don’t show up on anybody’s income statement or balance sheet.
Finally, at a European conference on loyalty, a Bain colleague provided a crucial insight into this conundrum. Watching the executives file out of the room after a presentation, seemingly pumped up about loyalty as never before, he shook his head. “You know, it’s sad,” he said. “Right now, they all understand that their businesses can’t prosper without improving customer loyalty. But they’ll get back to their offices and soon recognize that there is no one in their organization to whom they can delegate the task. There is no system to help them measure loyalty in a way that makes individuals accountable for results.”
Bingo. Accountability is one of those magic words in business. Any experienced manager will tell you that where there is individual accountability, things get done. Measure is another magic word: what gets measured creates accountability. With no standard, reliable metric for customer relationships, employees can’t be held accountable for them and so overlook their importance. In contrast, the precise, rigorous, daily measures of profit and its components ensure that those same employees—at least the ones who wish to stay employed—feel personally accountable for costs, revenues, or both. So the pursuit of profit dominates corporate and individual agendas, while accountability for treating people right, for enriching lives, for building good