The Link Between Loyalty and Profitability

Posted on 07/01/2009 in Sales Management

"Employee loyalty is linked to customer loyalty and retention, which leads to greater profitability”

–Frederick Reichheld, The Loyalty Effect

Customer Loyalty and Profitability

You probably aren’t surprised to read that companies with superior levels of customer loyalty and retention have the highest profit and growth rates. Customer loyalty generates repeat sales, increased sales, and referrals.

Numerous books and studies support the connection between customer loyalty, employee loyalty and profitability.  Did you know that approximately 40 percent of the companies in the Top 100 Fortune "America’s Best Companies to Work For” list also appear on the Fortune 500 List? For more details, please visit the following links:

Employee Loyalty is Essential to Customer Loyalty

You may be surprised, however, to learn that there is a direct link between customer loyalty and employee loyalty. You cannot maintain a loyal base of customers without a loyal base of employees!  Why is this true?  Your best and most loyal employees are more efficient than new employees, more empowered, more innovative, and more customer-focused, which improves the overall customer experience and satisfaction level.

Customer and Employee Churn

Consider these statistics from Reichheld’s book: 

1. When looking at all industries, it was found that average companies tend to lose 50% of their customers in 5 years and 50% of their employees in 4 years. Let’s call this customer churn and employee churn, for short. Ask yourself these two questions:
  • What effect does customer churn have on your profits?
  • What effect does employee churn have on your profits?

2. The best companies have dramatically lower employee and customer churn (as low as 5%, depending on the industry), and their profitability tends to be 2x to 10x higher than average companies.

This month’s newsletter will provide some suggestions on how to build employee loyalty and reduce employee churn. Next month’s newsletter will highlight what you can do to increase customer satisfaction and loyalty and reduce customer churn.

Building Employee Loyalty and Reducing Employee Churn

Employee satisfaction was initially viewed by many studies (see the links cited in the second paragraph) as the way to build employee loyalty. On the surface, this seems straightforward.  If employees are satisfied with their current work situation, they have less reason to leave and consequently will be more loyal to the current employer.

Yet, more recent research showed that employee commitment is a better measure than employee satisfaction. One example is the 2003 Institute for Employment Studies research, which cited that employee commitment had a higher correlation to customer satisfaction than employee satisfaction did.

We agree with the recent research that employee commitment is the desired goal.  If you prefer, the phrase employee engagement is almost synonymous with employee commitment.  A long term STAR client did an extensive study of their work force a few years ago, and found that their main area for improvement was to increase the level of engagement of many of their employees. They wanted all their employees, especially newer hires, to feel and act as if the company was their own. In a phrase, to be "fully engaged" and committed to the company’s success.

Here are some suggestions on how to build employee commitment and engagement, which in turn will create a higher level of employee satisfaction and loyalty:

  1. Hire the right people. It is much easier to start with the right employees than it is to fix people who shouldn’t be in the job in the first place. A high performing work team becomes self-sustaining, and contributes greatly to each employee’s perception that this is a great place to work.
  2. Empower employees, especially for the parts of their job that require customer interaction.  Next month’s newsletter will provide several practical suggestions on what employees can and should do when they interact with customers.
  3. Keep your employees informed.  The old way of management was to keep employees in the dark. Yet, think about the positive effect if employees understood the consequences of certain business actions.  For example, do your employees know that profits will improve if customer satisfaction and retention improves?  If they don’t know this type of information, there is little likelihood that they will change their behavior.
  4. Ask for and use the employee’s suggestions.  It motivates and empowers employees to see that their suggestions are listened to and used. The Alpha Measure article referenced earlier uses a very memorable phrase for this concept, namely that "involvement equals commitment”.
  5. Reward employees for doing the right things. Remember, different people are motivated by different things. Use a wide range of motivators and incentives such as monetary benefits, recognition, praise, and opportunities for advancement.

STAR has two workshops that directly address the subjects of employee and customer loyalty. STAR’s Coaching for Sales Success workshop is intended to help managers learn how to motivate and develop their employees and to build a loyal and effective workforce. STAR’s Customer Service and Support workshop teaches the skills to wow customers and to build customer loyalty and retention.