Monday, June 15, 2009

Measuring R.O.L.

Ask any group of 100 North American adults, "What is the Purpose of a Business?" and you will predictably hear one response more than any other.

Typically, more than 80% of any audience will respond on cue by saying, "the purpose of a business is to make money". And if you are like the majority, this response has also crossed your mind at one time or another.

But, this autopilot, knee-jerk response may not be the answer that provides the uncommon level of clarity required to own, operate and help build a sustainable business and remarkable brand.

The holes in the "make money" argument begin to appear when you ask, "Is making money really the purpose of a business, or is it the RESULT of a business fulfilling its purpose?"


Slowly, an awkward silence engulfs the room.

Invariably, one chatterbox will open up and offer a series of "ya buts", however, the smart people in the room will pause to reflect on the question that was just asked.

Making money.

Is it the Purpose or is it a Result?

It can't be both.

And what is a result, if not a form of measurement?

In the early 1960's Harvard business professor Theodore Levitt argued that identifying "making money" as a business purpose was the same as saying the purpose of life is to consume food and breathe oxygen. Eating and breathing are requisites to exist - not a purpose. Ted viewed "making money" and "profit" in much the same manner - as necessities. Let's face it, without a positive cash flow, any business will grind to a halt and collapse.

Levitt also maintained that pinning labels like "making money" and "profit" on the purpose donkey was morally shallow, since dollars can be made in so many devious ways. If no greater purpose can be identified, than how does a business and a brand morally justify its existence? The deeper you contemplate this issue, the more you realize that the "making money" answer is a reflection of the blind leading the blind.

Professor Levitt brought unusual clarity to this debate when he stated:

"The purpose of a business is to create & keep a customer.

That's it.

In order to accomplish that, you have to determine products and services that customers really want and value as well as say and do the right things that will make them eager to do business with you. If you don't give your customers some good reasons to stay, your competitors will give them plenty of reasons to leave. A business and a brand with the horsepower create and keep enough customers will win the "making money" race many times over.

Using "create & keep" as a compass for business purpose allows a brand to generate long-term loyalty from its customers. Many marketing experts concur the cost to acquire a new customer is 5-10 times greater than retaining an existing one. Typically, a 5% increase in customer retention can boost profits by as much as 25-t0-100%. (see the graph above.)

By holding on to your most profitable customers, your brand can reduce the cost of acquiring new ones and start to measure R.O.L. (Return on Loyalty).

Some repeat business or short-term behavior fixes can be bought, but long-term loyalty has to be earned. Long-term loyal customers buy more often, spend more money at higher prices, provide more referrals, are less expensive to serve, stay longer and have a higher lifetime value.

How much of your business energy and branding efforts are focused on keeping your existing customers?

While the road ahead is unclear, the winners will be the brands that remain focused on the long term. There may be no better way or time to build your businesses than by investing in a strategy that places loyalty at the finish line.

Where is your focus right now?

Is it fixated on "making money" and the daily, weekly, quarterly pursuit of cold, hard cash?

Or is it directed towards the person responsible for your profit in the first place and the one who is willing to stay with you for years on end?

Your customer.

"You don't earn loyalty in a day. You earn loyalty day-by-day"

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