Frederick Reichheld - The Loyalty Effect (1990s) Essay

Frederick Reichheld - The Loyalty Effect (1990s) - Essay Example According to Frederick, loyalty is essential because it creates customer retention which is usually the best way to measure how the company creates value. Loyalty also creates value for customers and builds growths and profits.Loyalty is linked to value creation because it reliably measures superior value delivery. Loyalty also brings economic effects such as; As the cost reduces, the revenues will rise increasing the profits. This will provide resources for investing in the business which will bring more profits that will enable the employee to get more compensation and thus they are retained. Increased profits in a company increase the company value and provide incentives for employees, customers, and investors so as to remain loyal to the company. Customer retention involves maintaining the previous or the long-term customers into their business. Normally, the performance of the business in all areas will play a role in retaining customers. A company that makes profits will enable the business to go large scale taking advantage of the economies of large scale. This will enable the business to offer the goods at a low price. There will be good remuneration towards the employees and therefore they will be retained more. When a customer is retained, their value for the future relationship with the businesses also retained. Therefore, retaining customers means retaining that lifetime value in terms of spending and their influencing power to the other possible customers through referrals. (Matthwew, 2011) According to the recent studies, it is cheaper to retain the existing customers than to hire new employees.However, the effect of retention on profitability can be huge because rising the customer retention rates by 5% increases the profits from 25% to 95%.This is because the lifetime value of a given customer is realized and the impact of retention goes beyond retaining this lifetime value.