Forget the moral question. Here's why packing the Cleveland Browns off to Baltimore wasn't even 'good business.' The bottom-line case for loyalty
The Cleveland Browns are giving business a bad name. Art Modell moves his team to Baltimore, thumbing his nose at the most loyal football fans in the country, and everyone says, "Well, that's business. You can't expect him to put loyalty ahead of money." As if that explained it. As if loyalty and business were incompatible. As if business loyalty were some kind of oxymoron. But of course, loyalty isn't at odds with business success. Loyalty is one of the secrets of business success, one of the key ingredients for sustained growth and profits. After all, every penny of the cash that flows into a company originates in customers' wallets, and that makes customer loyalty the most valuable asset any company can acquire, the one asset for which there is no substitute or replacement. A smart manager would never abandon 70,000 loyal customers or claim it was "good business" or "hard-nosed" to incinerate so valuable an asset.
Oh, I know, teams move all the time. Still, most have moved in order to find the kind of loyal fans the Browns have turned their backs on. The Rams and the Raiders were not drawing crowds in Los Angeles. Baseball's Boston Braves and St. Louis Browns were suffering attendance famines until they found their present homes and their present loyal followings. Maybe Art Modell will draw full houses in the much newer stadium Baltimore has offered him, but unless he can repeal some pretty basic laws of business, he will pay a price for reducing an invaluable asset to ashes.
Of course, I might be wrong -- about football, that is. Maybe pro sports is not so much business as politics and egomania, in which case standard business logic might not apply. Then again, maybe it really is a business, and in that case, Modell is tossing aside a resource he will find hard to replace. Because even if I'm wrong about football, I'm not wrong about loyalty. My shock at the Browns' departure stems only partly from the fact that I was born and raised in Cleveland, where wanting merely to tar and feather Modell is the mark of a forgiving nature. By far the larger share of my shock and disbelief stems instead from my 20 years as a business consultant, which have taught me the true, often astonishing value of a loyal customer base.
Over the years, my firm has studied industries from insurance and advertising to industrial laundries and fast food. My colleagues and I have learned that even very small improvements in customer loyalty can produce big improvements in company performance. In some industries, raising customer retention by as little as five percentage points -- for example, from 85% to 90% -- can double profits. Few businesses actually do the arithmetic of customer retention to see what effect high (or higher) loyalty might have on their cash flow, profits, and rate of growth, but the businesses that do have found that building loyalty is one of the principal hard-nosed methods by which small businesses grow big and big businesses grow great.
One reason is that you don't have to spend money replacing customers you never lose. (How much did the Browns spend on advertising and promotion in Cleveland, and how much will they spend in Baltimore?) Another is that a good customer franchise, like good wine, does not deteriorate over time but actually improves with age. (Look at the way the Browns' attendance grew even with a team that wasn't winning games.) Over time, good customers will spend more money; demand less time and attention from your organization; grow more inclined to give you the benefit of the doubt when it comes to small, fixable glitches; show decreasing sensitivity to price; and last but certainly not least, spread positive reports about your business. They will become your fans and generate more fans like themselves.
Maybe it all came too easily to the Browns. Given the team's lifetime won/lost record and the condition of its 1931 stadium, maybe the Browns had more good customers than they ever really earned. Big crowds were no surprise in the early 1950s, when the team made it to the NFL championship six years in a row. But then the Browns hit a dry spell that lasted for a generation, and attendance just went on climbing. Throughout the 1970s, Cleveland battled its way to just two play-off games -- and lost both of those -- yet average regular-season home-game attendance in 1979 was nearly twice what it had been in the winning 1950s.
Businesses that have put customer retention at the core of their operating strategies have had to put a great deal of thought, energy, and investment dollars into acquiring the kind of customer loyalty the Browns so casually jettisoned. Take State Farm Insurance, a company that has always worked hard to earn the loyalty of its customers. When Hurricane Andrew blew the roofs off houses because contractors had not properly anchored them to their frames, many companies paid the claims but refused to renew policies in South Florida. (In a manner of speaking, they moved their policies to Baltimore.) But State Farm had no intention of canceling the policies of customers it had taken great pains to acquire and retain, so it paid them more than their policies required in order to bring the houses up to code. Founded on a shoestring in 1922, State Farm today insures more than a fifth of the households in the United States and has accumulated a capital base of $20 billion.
Another example is advertising's Leo Burnett, which has 63 offices around the world, $600 million in annual revenues, and a 98% customer-retention rate. Burnett still has its first client -- Green Giant -- acquired in 1935, when Leo alone was most of the company. When the Oldsmobile account was up for review in 1993, the company closed one office entirely and moved dozens of people to consolidate its Oldsmobile staff in a single location. To top it off, the CEO resigned his executive position so he could concentrate on his role as chief creative officer. As a result, Leo Burnett kept the account.
It's an insult to call company disloyalty toward customers "business as usual," and it's inaccurate as well. Loyalty in business has lost none of its potential impact on company performance. In industry after industry, we have plotted out the life-cycle profit patterns for different levels of customer loyalty and seen effects on growth and cash flow that compound over time, exactly the way they once did for the Cleveland Browns. It's the job of a company's owners and executives to make something of an asset as priceless as a city full of faithful customers, because once you've found customers who are right for the value proposition you offer -- people who find your products and services more valuable than those of your competitors, people who pay promptly and produce a profit, people who identify so strongly with your brand that they wear it on their clothing (and sometimes tattoo it on various body parts), people who are inherently steady and predictable -- the sky is the limit.
Maybe predictable and steady aren't the first words that spring to mind when you think of the fans in Cleveland's famous Dawg Pound -- the seats behind the end zone, where the wind from Lake Erie blew coldest and spectators barked, wore dog collars, snacked on dog biscuits, and in general gave new shape and flavor to the term sports hound. But those were customers who predictably filled the less expensive seats and were utterly steadfast in their devotion to the team. After the final home game, last December, players and Dawgs joined each other in the bleachers, commiserating, embracing, even weeping, not wanting it to end. The Browns never played in a Super Bowl, but they were filling 90% of their stadium with customers this loyal. What in the world does Art Modell want? And what does he think he can get? Someone ought to remind him that outside Cleveland, NFL stands for No Fan Loyalty. If he cannot solve his financial problems with the most loyal fans in the world, how well is he going to do without them?* * *
Frederick F. Reichheld is a director of Bain & Co. and the author of The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value (Harvard Business School Press).