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The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value

by Frederick F. Reichheld
Harvard Business School Press, 1996

Frederick Reichheld argues that organizations today are blinded by profit. They set up their accounting and performance management systems to measure profit, as if how much money they have left over at the end of the year is an absolute measure of organizational health. Profit is, of course, very healthy for organizations. But it is not the best indicator of long-term health. To do that, you have to examine what Reichheld calls the “Loyalty Effect.”

With convincing research and quantitative explanations, Reichheld demonstrates that identifying, attracting, and retaining loyal customers (and loyal employees and investors) is more critical to an organization’s success than merely raking in a profit. The long-term value of customers and employees that are loyal (compared to those that defect after a year or two) is really staggering. His data show that a 5 percent customer retention rate increase can generate a 75% increase in profits.

Even for nonprofit organizations (particularly associations), the notion of loyalty is powerful, and has tremendous implications for an organization’s core strategy. Look at your sources of revenue: how much effort do you put into securing that revenue? Can you afford for those revenue sources to turn over as often as they do? If you have not examined these factors, both quantitatively and qualitatively, you are putting your organization at a strategic disadvantage.

The book is from the 1990s, but it remains a must-read (and still garners attention in business and industry press).