Too many companies are missing their biggest opportunity to keep costs down: building loyal relationships with employees and customers.
Many companies are tightening belts and cutting back, Northwestern Mutual is proud that it has never had a layoff in its 146-year history. And while the company has avoided layoffs with a passion, it also provides a total rewards package, including pay and benefits, that is among the leaders in the industry.
Ed Zore, the company's president and chief executive officer, believes that low turnover among his sales representatives greatly reduces the costs of bringing new sales talent on board while enhancing the experience and professionalism of the sales force. He estimates that the loyalty among its employees, financial representatives, and clients saves his company about $400 million a year.
Where does such loyalty begin? For the credit card company MBNA it starts with scouting the right team members.
MBNA invests heavily in recruitment and the education of its people in order to build a loyal work force. Prospective employees undergo an extensive interview process, including meetings with company officers. All new people learn the basics of the business in classroom settings and through supervised one-on-one interactions with customers. The turnover rate is well below the industry average.
One of the ways MBNA encourages loyalty is through performance feedback. It posts customer-oriented performance metrics on public notice boards and funds employee bonuses on days when the whole company hits more than 90% of its targets. The result? Strong, interdepartmental co-operation as MBNA people work together to achieve results that will benefit them all as well as their customers.
Loyalty Breeds Loyalty
In relationship-driven businesses like banking and insurance, loyal, skilled employees are the key to winning and keeping the right customers.
In fact, 96% of Northwestern Mutual's current customers remain with the company from year to year. That means dramatic savings on manufacturing and acquisition costs.
In financial services, a 5% increase in customer retention produces more than a 25% increase in profit. Why? Retained customers tend to buy more from a company over time; your operating cost to serve them declines. They'll often pay a premium to stay with you rather than switch to a competitor with whom they're neither familiar nor comfortable. What's more, they customers refer others to your company.
Of course, not every customer can be profitable and long-standing. Cost-effectiveness dictates that you segment to identify those that can, so you can target your investment in relationship building.
Consider the case of Vanguard, the cost leader in the mutual fund industry. Vanguard's expense ratio - total costs as a proportion of assets under management - is just 0.26%, compared with an industry average of 1.4%. One reason is that CEO Jack Brennan, like his predecessor, John Bogle, is committed to customer retention.
Brennan's particular passion is selecting the right kinds of customers - the kinds with high potential for long-term relationships with the firm. For example, a few years back it rejected an institutional investor that tried to invest $40 million in a fund.
Vanguard suspected that the customer would soon churn the investment, creating extra costs for all the existing customers. The customer complained publicly to The Wall Street Journal, but Brennan supported the decision. In fact, he used the incident as an opportunity to underscore the need to be selective about customers, as well as to keep their interests foremost.
MBNA is also picky about its customers. It markets primarily to affinity groups such as college alumni and members of professional and leisure organizations. These individuals apply for credit cards out of a sense of affiliation. With this strategy it has tapped into groups of customers who not only present less credit risk but are more likely to become loyal customers.
And loyal customers can make for loyal shareholders. Because Northwestern Mutual remains a mutual - its policyholders are its shareholders - it does not have the same short-term earnings pressure as publicly traded financial institutions. It can take a long-term perspective and make the needed investments in customer relationships over time.
"In a business built on relationships," says Zore, "the combined effect of employee, sales force, and customer loyalty can't be over-estimated."
What are the secrets of the loyalty leaders? The companies that best understand cost savings through loyalty take very deliberate steps. A few to consider:
Modify customer-acquisition incentives. Reward your sales teams and marketing channels for acquiring customers that stick. Consider commission or bonus reductions if customers defect before 18 months.
Reallocate marketing investments. Systematically rank all of your customer acquisition campaigns on the basis of their yield of loyal customers. Shift resources towards programs that attract the richest mix of loyal customers. (Many firms today are wasting half their marketing expenses on customers who will never stick around long enough to pay back the investment.)
Identify ways to help underperformers. Develop annual relationship report cards on suppliers and distributors (and customers and employees) with as much care as you give to annual reports for investors. Test a 360-degree feedback system, starting with senior managers and rolling out to all employees.
No company is immune to the pressures of the market. But companies that focus on building loyal relationships that by their very nature keep costs to a minimum are far better positioned to remain strong in the face of market turbulence.
