January 2011 | 

Who Stays and Who Goes? Finding Loyal Employees and Customers

Finding Loyal Employees and Customers

Conventional wisdom says that the longer someone stays with you, whether it's your employee or your customer, the more likely they are to stay. Loyalty, in other words, is signaled by tenure. It sounds so compelling, and yet, says Wharton marketing professor Peter Fader, it is very hard to find any empirical evidence that supports it.

Fader, academic director of Wharton's Executive Development Program (EDP), explains, "Every time a contract is renewed, either by a customer or employee, it's as if a coin is flipped. Heads they stay, and tails they go. But those coins are not the same. Some people are naturally more inertial, so their coin comes up heads more often. Others are naturally flighty – they're inclined to move on."

Fader continues, "Retention strategies are based on a couple of faulty core beliefs. The first is that those coins are the same, and the second that they change over time. The thinking is, 'We can make everyone more "headsy" if we keep them around long enough. The longer they stay, the more inclined they become to stay longer.' But that's not always true. In fact, when there is change, it's often in the other direction. People frequently tend to become more flighty over time. That's a radical notion, but numerous datasets (for customers and employees) support it. It's a phenomenon that has been studied over the past three decades by many academics, and there is a persistent pattern. In fact, I've never seen an analysis with careful controls that actually comes to the other, more 'intuitive,' conclusion. Conventional wisdom in this case is simply wrong."

Implications for Managers

"Once you let go of the notion that loyalty isn't built over time, the implications are huge," explains Fader. "It's not just an issue for marketing or human resources. This thinking needs to inform decisions across functions, throughout the organization. Think of it this way: you have two kinds of customers or employees. Those who are very inertial don't really need incentives. Giving them small bonuses or coupons is a waste of money, because you're not changing their behavior. On the other hand, you might be able to bribe people who are flighty to stay a little longer, but they're still more likely to leave. They get restless, or find reasons to be unhappy, and they move on. Giving that customer or employee incentives to stick around longer isn't fruitful.

"I like to use the metaphor of a fishing expedition. You're always fishing for employees or customers. Every time you throw the nets out, you get a mix [of the inertial and the flighty]. Becoming a better manager means you figure out where to throw the nets so you get a slightly better mix. Get creative – and scientific – about your acquisition efforts. Carefully consider all the factors associated with those efforts: where did you throw the nets when you got a better mix? When did it take place? What communication messages were associated with it? Were there bonuses involved? Then, instead of just repeating what worked, tweak it and do something better."

Fader stresses that running and learning from acquisition experiments yields a better payoff than ramping up retention activities. But he points out the need to do this cross-functionally. "That's one of the great lessons of EDP. In a marketing session, we'll look closely at the balances between acquisition and retention. Then we approach it from the talent management side. Participants see how concepts transcend each of the different business functions. Here we're talking about similarities of approach for customers and employees, but there are many other examples. Today's executives need to think and respond in this more holistic way. You need to understand finance, strategy, and negotiating – but not in a vacuum.

The EDP faculty makes up a learning community, and our sessions are coordinated. You're getting a nicely integrated picture, not a fractured set of snapshots of the business world. In my role as academic director, I help facilitate the connections between the sessions. The experience is much greater when you're able to take all of this learning and apply it as a whole to your role as an executive. It's what EDP is designed to do."