How is that possible?

Profitability is driven by loyalty. Your loyal customers shop you more often, tell their friends about you and tend to avoid your competitors. Loyalty develops as a consequence of doing something meaningful for people. “The numbers” strip out the human element—it doesn’t help you focus on what’s meaningful to your customers.

A blaring example is the decision to outsource your call center operation for customer support. No question—the cost savings in the short term can be enormous. But what’s the long-term customer attrition rate?

It costs fives times more to acquire a new customer than keep an old one. A high attrition rate means you have to funnel your resources into marketing and advertising in order to continually acquire new customers because you can’t keep your old ones.

Online retailer Zappos has over 75% repeat customers. Yes, they invest heavily in training and supporting their in-house customer service staff, but their 62,000% growth rate over the last 8 years speaks for itself. CEO Tony Hsieh doesn’t run Zappos strictly by the numbers, but instead keeps his focus on loyal customers and innovates around their needs.

Honor the human element in your business. Celebrate your customers. Support your employees. You’ll build more profitable businesses and you’ll also feel better about yourself.

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A blaring example is the growing call center industry. Why invest in full-salary employees with benefit packages for in-house customer service reps when you can outsource to India at a fraction of the cost?

Here’s why: Not only are you going to frustrate your customers and weaken your relationship with them, you are going to lose a precious opportunity to strengthen your customer’s commitment to your brand.

Plus, you make it easy for your competition to steal your market share:

• Online retailer Zappos has grown by a staggering annualized growth rate of 7,800% over the past 8 years, growing sales to over $1 billion. Its stellar in-house customer service team provides a powerful competitive advantage.
• L.L. Bean has always been known for world-class customer service. I’ve been a loyal customer for over a decade and can attest to the fact that I’ve never waited on hold for more than a few seconds. You automatically get a knowledgeable customer service reps who is also an L.L. Bean Brand Lover.
• DVD-by-mail provider Netflix has dominated the industry they invented and their online customer service, rated #1 by Nielsen Online, has helped them grow to almost 10 million subscribers. Realizing that their savvy customers prefer addressing customer service issues online, Netflix has anticipated virtually every potential issue and set up easy and quick ways to solve customer problems.

Every touch point matters. Your call center is just one touch point, but it’s a big one. Your website, advertising and packaging—everything you do either reflects your brand and strengthens your customer’s bond, or weakens it.

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The singular characteristic that all brands with loyal customers share is high integrity. After all, who would become loyal to a business if the brand were not honest, trustworthy and willing to serve?

Here are four signs that your brand possesses a high level of integrity:

1) Your brand demonstrates a willingness to genuinely serve its customers.

Great companies don’t just create meaningless slogans like “Customer Service Excellence”—they champion customer-centric values as a way of operating every aspect of their business. These businesses go beyond expectations to stand above their competitors. In addition to creating beautifully designed products, Apple supports their Mac User Groups (MUGs) as well as Genius Bar to help educate their customers on how to better use their Apple products.

2) Your brand listens to its customers on a meaningful level.

Corporate leaders of high-integrity businesses leave their comfortable offices and directly engage their customers. Sam Walton used to say, “If you don’t know what to do, go ask the customer. If it’s not happening in the store, it is not important to them.” Costco CEO Jim Sinegal apparently agrees; he visits a different Costco store every day.

3) Your brand exhibits caring awareness and a sense of community with its employees.

High-integrity businesses view their employees as family, not workhorses. Financial analysts criticize Costco for its generosity to its workforce but as CEO Jim Sinegal explains, “We’re trying to build a company that’s going to be here 50 and 60 years from now. We owe that to the communities where we do business. We owe that to our employees, that they can count on us for security.”

4) Your brand cultivates a company culture that reflects what its brand represents.

Companies like Apple, Google, Netflix and Zappos live by certain values that ignite passion in their customers. Because the company’s values are aligned with the customer’s values, customer loyal ensues. Led by CEO Tony Hsieh, Zappos has set a new standard in cultivating a customer-centric culture.

Companies with higher integrity aren’t perfect, but they never settle—they continually strive to improve their offerings and better serve their customers. Instead of playing to the competition, they create and nurture their own unique place in their customer’s hearts and minds.

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Great brands don’t just create meaningless slogans like “Customer Service Excellence”—they champion customer-centric values as a way of operating every aspect of their business.

These businesses excite us and make us happy to conduct business with them. It’s a symbiotic relationship between business and customer. The business provides products and services customers need and, in turn, the customers willingly patronize the business and support its existence.

Have many companies forgotten about the nature of business itself?

Outstanding businesses go above and beyond to better their customers’ lives:

• L.L. Bean wants you to be completely satisfied with your purchase. Don’t like the way a shirt holds up after a few years of use? Return it—L.L. Bean has no time limit on customer satisfaction.
• Online retailer Zappos offers free shipping both ways and a 365-day return policy.
• Along with one-click shopping, Amazon offers a Prime program that gives customers free 2-day shipping on most items and their Subscribe and Save feature offers both convenient and economical shopping.
• In addition to creating beautifully-designed products, Apple supports their Mac User Groups (MUGs) and Genius Bar to help educate their customers on how to better use their Apple products.
• Harley-Davidson sponsors HOG groups around the world and annual mega-rally events.
• Search and online advertising giant Google offers a robust offering of free services that help their customers in their daily lives from Google Reader, Google-411, Desktop Search, Google Earth, News Alerts, Google Calendar and Google Docs.

What does your business do to better serve its customers?

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You can’t do it if you use common thinking. You can’t do it by throwing gobs of money at an advertising budget. (Anyone remember Pets.com?)

You have to be smart, strategic and visionary. You have to adopt core values and live by them. You have to cultivate a culture that perpetuates those values. Most importantly, you have to excite your customers and cultivate loyalty to your brand.

Online retailer Zappos, led by CEO Tony Hsieh, went from $1.6 million in sales in 2000 to over $1 billion in sales this past year. What started out as an online shoe retailer is quickly morphing into a mega-retail clothing powerhouse. How did they do it?

Zappos’s tag line “Powered by Service” says it all. Zappos’s commitment to provide the best online shopping experience has led to a series of unique decisions designed to foster customer loyalty:

• To execute hyper fast order fulfillment, their fulfillment center operates 24/7.
• To ensure consistent fulfillment execution, they house all items in their warehouse (no drop shipping from outside sources).
• To take the risk of shopping online away from their customers, Zappos offers free shipping both ways. (To my knowledge, they were the first to do so.)
• To wow their customers and add the element of surprise, (Principle #7 in Why We Talk) they upgrade most orders to overnight or two-day shipping for free.
• To meet their customers’ diverse needs, they offer a staggering selection of over 1,000 brands and over 200,000 styles.
• To truly be “Powered by Service” their customer service staff goes through a five week training on the Zappos culture, core values and customer service protocol (including sending customers to their competitor’s websites on occasion).
• To ensure friendly, helpful staff aligned with the Zappos culture, they offer new hires $2,000 after the first week of training to leave the program if it’s not a good “fit.” (According to Hsieh, this saves them money in the long run.)
• To fulfill their customer’s higher human needs, Tony Hsieh is committed to delivering happiness to his customers.

I can keep going with this list. Zappos does a lot of things right (which helps explain why Jeff Bezos/Amazon.com just bought them). All of these attributes contribute to 75% of their sales coming from repeat customers.

What are the benefits of loyalty? Retention, more repeat business and positive word of mouth (customers create new customers for you). These are the ingredients needed to achieve a 62,400% growth rate.

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Did we choose to become obsessed with new? Not really.

There are two main drivers in this insatiable obsession. The first culprit is our animal brain, also called the limbic system. The animal brain is designed to scour the environment—to be on the look out for predators, prey and mates. The animal brain quickly detects what’s new or different in a familiar surrounding as a means of survival.

The second culprit is modern media. We have become programmed to believe that new equals better. Fashion, technology, automobiles and academic theories—every industry is susceptible to the “new” programming.

One example of “new mania” is the massive adoption of automated telephone systems and outsourced call centers. Businesses flock to these outsourced services in droves to achieve immediate cost savings. But what impact does this “new” option have on customer attrition rates and loyalty? Strong companies like L.L. Bean and Zappos have competitive advantages because they ignore the new trend and employ highly-trained, in-house customer service representatives.

The field of psychology provides another clear example. The new is heralded in terms like statistical relevance and evidenced-based practices. The old psychology was concerned with healing the suffering of real human beings. Pioneering thinkers like William James, Sigmund Freud and Carl Gustav Jung have become footnotes whose works are barely taught in many graduate programs. The intuitive brilliance and observational power of these great minds have been lost in obscurity by the field’s perennial focus on the new.

There are many pitfalls with our obsession with the new, but most importantly, we often disregard what’s working effectively and replace it with something that’s not.

If the old works well and it has integrity, be skeptical of the new. It’s one thing to improve on the old; it’s another to disregard the old because it’s fashionable to do so.

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1999: Selection (of shoes)
2003: Customer Service
2005: Culture and Core Values as their Platform
2007: Personal Emotional Connection
2009: Delivering Happiness

Several key take-aways for smart business people:

1. A strong brand is constantly evolving, but not changing directions. This is critical. You probably don’t want or need to re-invent your brand, but you also can’t be stagnant. (It’s also interesting to see how a brand’s logo can evolve over time.)
2. Strong brands tend to move up Maslow’s Hierarchy of Human Needs. Zappos continues to move in a more humanistic direction. They’ve always been about people, but now they are moving upward to a more meaningful connection with their customers and employees. Delivering happiness is a tall order, but simply holding that intention will create new opportunities to wow their customers and employees and lead to greater loyalty.

For anyone interested in the power of brand loyalty and how to build a business for the long-term, Zappos is an ideal company to study. Zappos demonstrates that many of the intangible qualities of business like values, culture and willingness are more important than many transactional-oriented executives care to believe. Otherwise, why would anyone care about a shoe e-tailer? And how could they grow by approximately 7,800% annually for the last nine years?

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Zappos offers new hires a $2,000 bonus to quit after week one of four weeks of paid training. CEO Tony Hsieh explains, “It’s best to know early on if an employee doesn’t buy into the vision or the culture.”

You also won’t last very long in companies like Southwest Airlines, Netflix, Apple, Umpqua Bank, or Google if your attitude isn’t aligned with the company’s core values.

It isn’t easy to find the right people, but it’s impossible if you don’t define what your culture stands for.

With a distinctive, clearly-defined culture your job gets much easier. By being the best expression of what your culture represents you’ll naturally attract employees aligned with your culture and repel those who are not.

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True organizational results are achieved on the “outside” because everything “inside” is related to effort and cost, not profit. These outside results positively impact your customers.

From this perspective we can better understand the need for clear direction—to an ultimate vision—within any enterprise. Without a clear end picture, effort and cost will spiral upward as the company’s employees lack focus and direction.

As a leader, your job is to provide a clear vision for how your business will serve your customers better than anyone else. Companies with this obsessive focus win. They build extraordinary internal cultures that attract people who want to join in their mission.

A few examples:

• Netflix effectively dismantled Blockbuster (and fought off Wal-Mart) with laser focus on serving their customers with high integrity and dependable service.
• The Motley Fools has become an oasis of honest financial commentary in a sea of Wall Street spinsters and celebrity commentators.
• Zappos built a legion of loyal shoppers by delivering world-class customer service 24/7, 365 days a year with free shipping both ways.

The single purpose of a business is to create a customer. Cultivate a culture that respects and lives this reality and you’ll join the ranks of strong brands that build sustainable, profitable enterprises.

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