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During a recent meeting with executives of a large U.S.-based retailing company, the president and chief operating officer made an assertion that resonated closely with statements we have heard time and again from other senior managers. “We’ve found that there’s a direct correlation between [X], [Y] and our bottom-line profitability,” the executive said with pride. Almost every day, senior managers, using their own Xs and Ys, make similar claims — as if to say that, at last, they have finally uncovered the levers that drive performance.
Many of today’s senior managers have an impressive understanding of operations. For example, they know how faster cycle times and lower costs can lead to improved profits. However, they often run into problems when they overreach — when they seize upon causal relationships that are tenuous at best and perhaps don’t even exist. It’s hard to believe that corporate managers who are entrusted with the financial health of their organizations would consciously embrace distorted views of reality. But if one considers some of the more popular management fads of recent years — for example, reengineering, total quality management or diversification — one has to wonder about senior management’s overall level of due diligence. Indeed, select any area of management, and a sober examination is likely to reveal that the best-known shibboleths are deeply flawed.
As consultants in the field of customer retention, we recently conducted an investigation into commonly held beliefs about customer loyalty. We initiated our study after hearing numerous complaints from managers that their loyalty initiatives were not living up to expectations and their investments just weren’t paying off. We decided to examine as many beliefs about customer loyalty as we could find and match them up against the tactics that companies were employing to spur customer loyalty. We used data from practitioners and academics and our own experience with hundreds of companies worldwide to test maxims like, “It costs more to acquire a customer than to retain a customer” and “Loyal customers are more profitable to serve.”
In the course of our research, we found to our surprise that many of the most popular assertions about loyalty were little more than myths. For example, in digging into the oft-repeated claim about the benefits of retaining current customers over the costs of attracting new ones, we found several flaws.
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