Customer Experience

E-Loyalty: Your Secret Weapon

on the Web
by Frederick F. Reichheld and Phil Schefter

From the Magazine (July–August 2000)

Leer en español

Loyalty may not be the first idea that pops into your head when
you think about electronic commerce. After all, what relevance
could such a quaint, old-fashioned notion hold for a world in
which customers defect at the click of a mouse and impersonal
shopping bots scour databases for ever better deals? What good is
a small-town virtue amid the faceless anonymity of the Internet’s
global marketplace? Loyalty must be on a fast track toward
extinction, right?

Not at all. Chief executives at the cutting edge of e-commerce—

from Dell Computer’s Michael Dell to eBay’s Meg Whitman, from
Vanguard’s Jack Brennan to Grainger’s Richard Keyser—care
deeply about customer retention and consider it vital to the
success of their on-line operations. They know that loyalty is an
economic necessity: acquiring customers on the Internet is
enormously expensive, and unless those customers stick around
and make lots of repeat purchases over the years, profits will
remain elusive. They also know it’s a competitive necessity: in
every industry, some company will figure out how to harness the
potential of the Web to create exceptional value for customers,
and that company is going to lock in many profitable
relationships at the expense of slow-footed rivals. Without the
glue of loyalty, even the best-designed e-business model will
collapse.

Over the past two years, we have been studying e-loyalty with our
colleagues at Bain & Company. We have analyzed the strategies
and practices of many leading Internet companies, evaluated the
designs and workings of their Web sites, and surveyed thousands
of their customers. What we’ve uncovered may come as a
surprise. Contrary to the common view that Web customers are
fickle by nature and will flock to the next new idea, the Web is
actually a very sticky space in both the business-to-consumer and
the business-to-business spheres. Most of today’s on-line
customers exhibit a clear proclivity toward loyalty, and Web
technologies, used correctly, reinforce that inherent loyalty. If
executives don’t quickly gain the loyalty of their most profitable
existing customers and acquire the right new customers, they will
face a dismal future catering to the whims of only the most price-
sensitive buyers.
We’ve heard new-economy pundits argue that the Internet has
overturned all the old rules of business. But when it comes to
customer loyalty, the old rules are as vital as ever. Loyalty is still
about earning the trust of the right kinds of customers—
customers for whom you can deliver such a consistently superior
experience that they will want to do all their business with you.
The Web does, however, raise new questions and open new
opportunities: it places the old rules in a new context. Our goal in
this article is to describe that context and its implications.

The Economics of E-Loyalty

Ten years ago, Bain & Company, working with Earl Sasser of
Harvard Business School, analyzed the costs and revenues
derived from serving customers over their entire purchasing life
cycle, and we published the results in this magazine. (See “Zero
Defections: Quality Comes to Services” in the September–October
1990 issue.) We showed that in industry after industry, the high
cost of acquiring customers renders many customer relationships
unprofitable during their early years. Only in later years, when
the cost of serving loyal customers falls and the volume of their
purchases rises, do relationships generate big returns. The bottom
line: increasing customer retention rates by 5% increases profits
by 25% to 95%. Those numbers startled many executives, and the
article set off a rush to craft retention strategies, many of which
continue to pay large dividends.

When we applied the same methodology to analyzing customer

life-cycle economics in several e-commerce sectors—including
books, apparel, groceries, and consumer electronics—we found
classic loyalty economics at work. In fact, the general pattern—
early losses, followed by rising profits—is actually exaggerated on
the Internet. (See the exhibit “Customer Life-Cycle Economics in
E-Commerce.”) At the beginning of a relationship, the outlays
needed to acquire a customer are often considerably higher in e-
commerce than in traditional retail channels. In apparel e- ailing,
for example, new customers cost 20% to 40% more for pure-play
Internet companies than for traditional retailers with both
physical and on-line stores. That means that the losses in the
early stages of relationships are larger.
Customer Life-Cycle Economics in E-Commerce Source: Bain &
Company and Mainspring

In future years, though, profit growth accelerates at an even faster

rate. In apparel e-tailing, repeat customers spend more than twice
as much in months 24–30 of their relationships than they do in
the first six months. And since it is relatively easy for Web stores
to extend their range of products, they can sell more and more
kinds of goods to loyal customers, broadening as well as
deepening relationships over time. The evidence indicates, in
fact, that Web customers tend to consolidate their purchases with
one primary supplier, to the extent that purchasing from the
supplier’s site becomes part of their daily routine. This
phenomenon is particularly apparent in the business-to-business
sector. For example, W.W. Grainger, the largest industrial supply
company in the United States, discovered that long-time
customers, whose volume of purchases through Grainger’s
traditional branches had stabilized, increased their purchases
substantially when they began using Grainger’s Web site. Sales to
these customers increased at triple the rate of similar customers
who used only the physical outlets.

In addition to purchasing more, loyal customers also frequently

refer new customers to a supplier, providing another rich source
of profits. Referrals are lucrative in traditional commerce as well
but, again, the Internet amplifies the effect, since word of mouse
spreads even faster than word of mouth. On-line customers can,
for example, use e-mail to broadcast a recommendation for a
favorite Web site to dozens of friends and family members. Many
e-tailers are now automating the referral process, letting
customers send recommendations to acquaintances while still at
the e-tailers’ sites. Because referred customers cost so little to
acquire, they begin to generate profits much earlier in their life
cycles.

EBay is one e-commerce leader that is reaping the economic

benefits of referrals from loyal customers. More than half its
customers are referrals. “If you just do the math off our quarterly
financial filings,” CEO Meg Whitman recently told the Wall Street
Journal, “you see that we’re spending less than $10 to acquire
each new customer. The reason is that we are being driven by
word of mouth.” EBay has even found that the costs of supporting
referred customers are considerably lower than for those brought
in through advertising or other marketing efforts. Referred
customers tend to use the people who referred them for advice
and guidance rather than calling eBay’s technical support desk. In
effect, loyal customers not only take over the function of
advertising and sales, they even staff the company’s help desk—
for free!

The combination of all these economic factors means that the

value of loyalty is often greater on the Internet than in the
physical world. For all companies doing business on the Web, the
implication is clear: you cannot generate superior long-term
profits unless you achieve superior customer loyalty.

A Matter of Trust
To gain the loyalty of customers, you must first gain their trust.
That’s always been the case, but on the Web, where business is
conducted at a distance and risks and uncertainties are
magnified, it’s truer than ever. On-line, customers can’t look a
sales clerk in the eye, can’t size up the physical space of a store or
office, and can’t see and touch products. They have to rely on
images and promises, and if they don’t trust the company
presenting those images and promises, they’ll shop elsewhere. In
fact, when we asked Web shoppers to name the attributes of e-
tailers that were most important in earning their business, the
number one answer was “a Web site I know and trust.” All other
attributes, including lowest cost and broadest selection, lagged far
behind. Price does not rule the Web; trust does.

Price does not rule the Web; trust

does.

When customers do trust an on-line vendor, they are much more

likely to share personal information. That information enables
the company to form a more intimate relationship with
customers, offering products and services tailored to their
individual preferences, which in turn increases trust and
strengthens loyalty. Such a virtuous circle can quickly translate
into a durable advantage over competitors.

Amazon.com, for example, has come to dominate the on-line

book market by creating the most reliable and trustworthy Web
site in the business. Millions of customers feel comfortable letting
Amazon store their names, addresses, and credit card numbers in
its ordering system. The resulting convenience—customers can
make repeat purchases with just one click—has become a critical
competitive edge. It’s one of the biggest reasons customers keep
coming back—to buy not just books but also CDs, videos,
hardware, and myriad other products. If customers didn’t trust
Amazon, if they feared that their credit card numbers might be
compromised or that they might be deluged with a torrent of
spam, they would never share their personal information, and the
company would quickly lose its privileged position. The company
understands the value of trust very well. In 1999, when the media
revealed that Amazon was accepting compensation from
publishers for its purportedly independent book reviews, it
reversed course immediately. It realized it was putting its most
important asset at risk.

Another exemplary company that uses trust as the foundation for

loyalty is the Vanguard Group. The fastest growing mutual fund
company over the past decade, with more than $500 billion in
assets currently under management, Vanguard has poured more
than $100 million into the development of its Web site. Unlike
many of its competitors, Vanguard doesn’t use the site to hype its
products. Rather, it uses its on-line presence to inform and
educate its customers—even when that means leading them away
from a purchase. When you click through Vanguard’s pages, you
are often warned against investing in certain funds. You may, for
example, receive a message advising you that one fund is
approaching its dividend distribution date and suggesting that
you postpone investments to avoid incurring tax liabilities. Or
you may see certain funds flagged because their recent
performance has been particularly strong. The descriptions of
such high-fliers usually bear a note of caution from CEO Jack
Brennan warning that recent returns may not be sustainable in
the future. That’s quite a contrast from most fund companies,
which lure investors by aggressively promoting the returns of hot
funds.

Vanguard understands that building trust leads to more enduring

relationships—and more profits—while a quick sale may simply
leave a customer feeling cheated. Says Brennan: “Trust is our
number one asset at Vanguard. We recognize you can’t buy trust
with advertising or salesmanship; you have to earn it—by always
acting in the best interests of customers. We didn’t design our
Web site to sell more products and services. We designed it to
educate our customers and provide better and more timely
information and advice so they can make better decisions.”

Vanguard goes against the grain of common Web strategy in

another way: it makes it difficult for customers to access its site.
Account holders must first apply for a password, which, instead of
being delivered immediately via e-mail, is mailed from
headquarters to ensure confidentiality. Then, to actually enter the
site, customers have to upgrade to a 128-bit browser that is
compatible with the sophisticated encryption technology
Vanguard created to guard account information. Downloading
the browser can take an hour or more. “Sure, the 128-bit
encryption security requirement can be a hassle,” says Brennan,
“but we believe it is the right way to protect our customers’
assets.” The strategy is paying off. Vanguard’s site already
accounts for 40% of the company’s interactions with customers
and, for all its quirkiness, has received numerous honors,
including the Webby Award for site design.

In addition to generously rewarding trust, the Internet opens new

opportunities to build trust. Everyone knows, for example, that
communities flourish on the Web. Less understood is how the
trust built up in such communities can be transferred to the
companies that host them. Again, eBay provides a great example.
In the past, fears about reliability and fraud prevented the
exchange of used merchandise among strangers from developing
into a big business. But eBay used the unique capabilities of the
Web to establish and enforce rules of engagement. Buyers and
sellers rate each other after every transaction, and the ratings are
posted on the site; every member’s reputation thus becomes
public record. EBay further reduces customers’ risks by
automatically insuring the first $200 of each transaction, thus
insulating sellers from unscrupulous buyers, and it will hold
money in electronic escrow until the buyer is satisfied with the
merchandise received. In a sense, eBay is using the Internet to
bring small-town rules of trust to the most challenging of markets
—a global network of strangers. And it is reaping the rewards of
its members’ loyalty.

Focusing on the Right Customers

When many executives and entrepreneurs look at the Web, they
see an opportunity to break free from one of the core constraints
of the traditional business world: the need for focus. Because a
Web site is accessible to any on-line customer anytime, anywhere,
there is a huge temptation to try to attract as many potential
buyers as possible. That temptation is reinforced by the vast up-
front investments in site development and process design that
companies often have to make in launching an e-business.
Executives presume that these fixed costs should be amortized
over as many customers as possible. So they become caught up in
a frenzy of indiscriminate customer acquisition, gauging their
success by the sheer number of page views, unique visitors, and
sales they rack up. The fact that careful customer selection has
always been a foundation of business success gets completely
ignored.

A lack of focus makes building loyalty much more difficult.

Customers want Web sites that are simply designed, fast to load,
and easy to use, but the broader the array of customers a company
attempts to serve, the more complex its site inevitably becomes.
In trying to be all things to all people—to accommodate all levels
of technical expertise, all service requirements, all price
sensitivities, and all degrees of brand preference—it must
constantly add new features and functions. As it does, its site
becomes slower to load and more complicated to use. Customers
flock in but, confused by what they find, they rarely return. (See
the sidebar “How Grainger Helps Customers Make Sense of
Complexity.”)
How Grainger Helps Customers Make Sense of
Complexity

The Web creates an almost infinite set of product and

service possibilities, freeing companies from all sorts of
...

An indiscriminate approach to customer acquisition also

undermines profitability—a fact that is often overlooked in e-
commerce, as investors and executives focus their attention on
traffic statistics. The simple arithmetic of loyalty economics
makes it clear that in most Web businesses, customers must stay
on board for at least two to three years just for a company to
recoup its initial acquisition investment. Yet we found that a large
percentage of new customers—up to 50% in some sectors—defect
before their third anniversary with an e-commerce site. Any
company pursuing a strategy of grabbing customers as quickly as
possible without regard to their potential for long-term
relationships is in for a very bad surprise—as are its investors.
(See the exhibit “The High Cost of Low Loyalty.”)
The High Cost of Low Loyalty Source: Bain & Company and
Mainspring

Vanguard’s experience reveals the wisdom of focus. It has created

both strong customer loyalty and a substantial cost advantage
through its highly disciplined approach to attracting customers.
The company concentrates on individuals with long-term
investment horizons who appreciate the low-cost, low-churn
advantages of index fund investing—Vanguard’s specialty; it has
honed its marketing and customer acquisition activities to cater
to that segment. Its relentless focus has allowed it to maintain an
overwhelming cost advantage: its expenses as a percentage of
average assets run at 30 basis points versus 120 for competitors.
Vanguard spends, for instance, only about one-tenth of what
competitors do on advertising, yet it adds new customers faster
than most of them due to word-of-mouth recommendations. It
also minimizes its operating complexity by investing only in
those features and products that appeal to its target customers.

In moving to the Web, Vanguard has been careful not to dilute its
focus; its site is tailored to the needs of its core customers.
Vanguard.com’s brokerage arm, for instance, does not provide the
kind of sophisticated trading capabilities other on-line brokerages
offer. The company made a conscious choice to forgo the business
of speculators in order to cater to its traditional, more
conservative clients. The typical Vanguard brokerage customer,
who trades only three or four times a year, would simply be
confused by the complex information screens that day traders
demand.

In identifying which customers to attract—and which to avoid—

the first step is to clearly assess the different categories of on-line
customers. Contrary to a common perception, the majority of on-
line shoppers are not out to score the absolute lowest price. The
largest single segment of on-line customers, we found, are seeking
convenience above all else. They want to do business with a site
that makes their lives easier, and they are willing to pay more for
that convenience. Price rational but not price obsessive, they also
have a strong inclination toward loyalty. After all, returning to a
familiar site is much more convenient than scouting out a new
one. Another large group of customers are influenced primarily
by brand. They, too, are looking for stable, long-term
relationships. If a company assumes that the customers it is
losing to dot-coms are motivated solely by price—and thus not
worth defending—it is probably mistaken.

If a company assumes that the

customers it is losing to dot-coms are
motivated solely by price—and thus
not worth defending—it is probably
mistaken.
The way a site is designed and marketed has a large impact on the
types of customers it attracts. Our research reveals that the mix of
customer segments varies widely among Web competitors within
the same market; some sites attract a rich mix of loyalty-oriented
customers and others primarily attract the price butterflies who
flit from site to site seeking bargains. In the grocery business, for
example, 75% of one leading company’s new customers are
relationship-averse bargain hunters, while 75% of a direct
competitor’s new customers are convenience- and brand-driven
shoppers.

The loyalists we surveyed found sites mostly through referrals.

The butterflies, by contrast, reported that they were lured by
promotional discounts and general advertising. In the grocery
segment, for example, the best butterfly bait seemed to be
untargeted banner ads. If a Web company is spending most of its
marketing dollars on indiscriminate banner ads and on-line
coupons, with little investment in building communities and
promoting referrals, it is probably building long-term losses into
its customer base.

Learning About Loyalty

While the Internet may seem like an anonymous space, in reality
it is far easier to track customers, their purchase histories, and
their preferences online than in a traditional business setting.
Customers in bricks-and-mortar stores leave no record of their
behavior unless they buy something—and even then the data are
often sketchy. But in virtual stores, their shopping purchase
patterns are transparent. Every move they make can be
documented electronically, click by click. If a customer exits a
Web site when the price screen appears, it’s a fair bet that he’s
price-sensitive. If he jumps from page to page without ever
initiating a transaction, he’s probably frustrated at being unable
to find what he wants.

By providing such rich data, the Internet offers companies

unprecedented opportunities for getting to know their customers
in depth and for customizing offerings to meet their preferences.
Very few companies, however, are actually doing much to realize
that potential. We found that less than 20% even track customer
retention rigorously, let alone try to systematically learn from
customer defection patterns. Instead, they are fixated on building
their Web capacity and increasing their visitor counts, click-
throughs, and on-line sales. As a result, they overlook
opportunities for upselling and cross-selling and end up
capturing a much smaller share of customers’ overall purchases
than they might have. Research shows, in fact, that the average
Web site achieves less than 30% of its full sales potential with
each customer.1

America Online is an exception. It meticulously measures

customer loyalty and purchase patterns and uses that
information to guide its decisions about strategy, marketing, and
site design. To the casual observer, the company’s approach to
customer acquisition may seem like a carpet bombing of free
diskettes, but the approach is based on a careful analysis of the
retention rates and life-cycle economics of different customer
segments. The company conducts many small-scale tests of
creative customer-acquisition programs, but it invests heavily
only in those that are likely to bring in customers whose long-run
revenues justify their acquisition cost.

When AOL upgraded its software from version 3 to version 4, data

on customer behavior informed many of its technological
decisions. For example, AOL had been carefully monitoring the
root causes of calls to its customer support center, and it made
improvements to the new software, such as making the help
menu easier to use, that solved the problems generating a large
percentage of the calls. AOL knew that handling fewer calls would
reduce its support costs, but that was not its primary impetus. Its
core goal was to enhance the convenience of its service—and thus
strengthen its appeal to and its hold on convenience-driven
customers. The company also analyzed the drivers of customer
loyalty in creating the upgrade. It had found that customers were
much more likely to maintain their accounts when AOL was part
of their daily routine, so it enhanced the software’s calendar and
scheduling functions and its stock-portfolio tracking service. As
customers have increasingly used AOL to manage their day-to-
day lives, the service has become much more sticky.

Dell Computer is another company that has made the

measurement of customer behavior a cornerstone of its e-
business strategy. The company set up a customer experience
council, reporting to a corporate vice chairman, to oversee its
measurement efforts and its loyalty-building programs. Senior
executives from each of the company’s major business lines and
functions participate in the council. In a recent interview, council
member and senior vice president Paul Bell explained that Dell
looks to apply the same rigor to tracking customers as most
companies do to tracking financial results: “Every public
company tells shareholders how it’s doing every quarter, but few
companies have a set of metrics that measure the customer
experience from month to month, quarter to quarter [as we do].”

After studying data on customer retention, the council found

three key drivers of loyalty: order fulfillment, product
performance, and postsale service and support. It then identified
the best summary statistic for each driver. For order fulfillment, it
chose “ship to target,” which measures the percentage of orders
delivered to the customer on time with complete accuracy. For
product performance, it picked “initial field incident rate,” which
measures the frequency of product problems encountered by
customers. For service and support, it chose “on-time, first-time
fix,” which measures the percentage of problems fixed on the first
visit by a service rep who arrives at the time promised.

The council set up systems to track each statistic, and the

performance data are updated daily and shared with all
employees. In addition, aggressive improvement targets have
been established for each measure, and management bonuses are
tied to their fulfillment. Dell tracks many other aspects of service
performance and customer response, of course, but by focusing
its organization on the three summary measures, it has simplified
its goals and created a rallying point for employees. In 1999, the
program achieved a 15% rate of improvement, and similar gains
are expected in the future.
Another metric tracked by most loyalty leaders is the lifetime
ownership cost of their products or services. Dell, for example,
calculates all the costs its customers incur in shopping for,
ordering, installing, operating, servicing, and disposing of
computers and necessary software—whether those costs are paid
to Dell or to other parties. That information guides the company’s
investments in new products and services; Dell places a high
priority on investments that create new revenue streams for the
company while reducing customers’ overall ownership costs and
thus strengthening their loyalty. An example of such an
investment is the Dell Auction site, where customers can sell their
outdated equipment. The auction benefits the customer while
generating fees for Dell.

The real value of tracking measures of loyalty is that it allows

companies to see beyond today’s fads to the underlying drivers of
business success. In studying repurchase patterns at leading Web
sites, we found that the five primary determinants of loyalty don’t
consist of technological bells and whistles, but rather old-
fashioned customer-service basics: quality customer support, on-
time delivery, compelling product presentations, convenient and
reasonably priced shipping and handling, and clear and
trustworthy privacy policies. Of course, the drivers of loyalty will
vary for each business and will evolve over time. But executives
who don’t set clear loyalty targets and measure their progress will
inevitably drift toward weak retention performance as their
organizations focus their energy in less productive areas. The
long-term economic consequences of such a passive approach to
e-loyalty will be dire.
The Big Picture
Many companies have been tempted to split their Web businesses
from the rest of their operations—in hopes of cashing in on
investors’ enthusiasm for dot-coms or of making it easier to
attract the kind of talent required to manage Web activities. In the
short run, such a strategy may create benefits; over the long run,
however, it is likely to erode customer loyalty. After all, when a
customer does business with a company, she doesn’t distinguish
between a transaction on the Web and one in a physical store or
branch—they are both elements of her total experience with the
company. Leaders like Vanguard, Dell, and Grainger understand
that loyalty is determined by the full range of their interactions
with customers, and they consciously integrate their operations
to produce a seamless, quality experience.

In this view, the Web becomes, to borrow a phrase from

Vanguard’s Jack Brennan, “a tool, not a strategy.” Its unique
capabilities are used to improve communications with customers,
to enhance organizational learning about customers’ needs and
increase responsiveness, to reduce customers’ transaction costs,
and to enhance convenience—all of which are vital for developing
strong and durable relationships. But these capabilities are not
exercised in isolation. They are plugged into the full range of
corporate capabilities.

When an employee of one of Dell’s corporate customers needs to

order a computer from Dell, for example, chances are good that
one of Dell’s more than 2,000 direct sales representatives has
already worked face-to-face with the company’s purchasing staff
to hammer out pricing schedules and hardware and software
configurations. The individual employee is thus free to place the
order over the phone, on the Web, or through the mail, whichever
is most convenient, and can subsequently draw on those
channels, in any combination, to check on the order’s progress or
to ask questions. And when the machine arrives, it doesn’t have to
be routed through the company’s IT help desk to have inventory
tags applied or software configured—Dell has already done that. If
there’s a technical problem, the employee or a corporate
technician can access customized diagnostic and prescriptive
information on the Web or over the phone with a Dell technician.
This exceptional integration of customer service is what
distinguishes Dell from the competition and makes life much
easier for the customer.

Grainger is another company that seamlessly integrates its Web

channel with its traditional business. It has spent more than $75
million to build its highly successful Web operation, which now
transacts more sales than all but a handful of other business-to-
business sites. Customers clearly appreciate the site’s 24-hour
availability—nearly one-fourth of Grainger’s Web orders come in
during times when its branches are closed. But Grainger does not
view the Web channel as a way to reduce costs by bypassing its
commissioned sales force. Rather, it pays sales commissions no
matter which channel is used. That way, the sales reps will always
direct customers to the most convenient channel. Grainger’s goal
is to earn an ever-higher share of each customer’s business—and
because it never loses sight of the overall customer experience, it
is succeeding. Its customers are increasing their Web purchases at
more than double the rate for the overall industry.
 Grainger does not view the Web as a
way to reduce costs by bypassing its
commissioned sales force. It pays
sales commissions no matter which
channel is used.

Home Depot, which most people view as a purely bricks-and-

mortar retailer, has also done an exemplary job of integrating the
Web with its traditional business. Because small contractors are
one of the company’s most profitable segments, its Web site
focuses on serving these customers better. Contractors can check
the Web to see if their orders are available for pickup at the store,
thus saving themselves (and store personnel) both time and
aggravation. While this new Web capability does not directly
generate more revenues, it does increase the value delivered to a
group of highly profitable customers and thus increases the
likelihood that they’ll continue to buy from Home Depot.
Integration strengthens loyalty.

Nothing but the Truth

In the end, loyalty is not won with technology. It is won through
the delivery of a consistently superior customer experience. The
Internet is a powerful tool for strengthening relationships, but the
basic laws and rewards of building loyalty have not changed. By
encouraging repeat purchases among a core of profitable
customers, companies can initiate a spiral of economic
advantages. This loyalty effect enables them to compensate their
employees more generously, provide investors with superior cash
flows, and reinvest more aggressively to further enhance the
value delivered to customers.

What is changing is the pace at which these economic rules are

playing out, and the speed with which companies must improve
their products and services if they hope to keep customers loyal.
Customers’ tolerance for inconsistency and mediocrity is rapidly
disappearing. In the past, convenient store locations, aggressive
sales forces, and a general lack of information shielded companies
from the penalties of providing anything less than the best
product and service quality; customers were loyal by necessity,
not choice. Thanks to the Internet, those shields have been
dismantled. Customers can compare suppliers in real time, all the
time. Building superior customer loyalty is no longer just one of
many ways to boost profits. Today it is essential for survival.

1. See Sarabjit Singh Baveja, “Making the Most of Customers,”

Industry Standard, February 28, 2000.

A version of this article appeared in the July–August 2000 issue of Harvard

Business Review.
 FR
Frederick F. Reichheld
([email protected]) is a Boston-based
director emeritus at Bain & Company, and the
author of Loyalty Rules! (Harvard Business
School Press, 2001). His next book, The
Ultimate Question, is due in early 2006 from
Harvard Business School Press.

PS
Phil Schefter is a vice president of Bain &
Company and the coauthor with Frederick
Reichheld of “E-Loyalty: Your Secret Weapon
on the Web” (HBR July–August 2000).

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