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Customer loyalty means greater profi tability

September 1, 2007
by Anthony J. Mullen, CPA, MS
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Based on an interview with Anthony J. Mullen, CPA, MS, Senior Fellow, National Investment Center for the Seniors Housing & Care Industry, and Partner, Royal Star Partners

We hear constantly about the importance of customer satisfaction to the success of today's businesses. New tools emerge regularly to measure customer satisfaction, and their results are used for continuous quality improvement and marketing outreach. I would submit, however, that customer satisfaction in itself, while necessary, is not sufficient for business success.

And by “business,” in this instance, I mean long-term care. What can long-term care businesses do to ensure their success and profitability? Perhaps the most important step: They can engender customer loyalty.

Customer loyalty is not customer satisfaction—it goes beyond that. Customers are not only satisfied, they are happy—so happy that they've become loyal, even evangelists for the community. The concept of customer loyalty focuses on three questions: Would I recommend this community to a relative or friend? Did I recommend this community to a relative or friend? Did that relative or friend actually move in as a result? The waiting list grows and, eventually, the community becomes recognized as “the best.” And that enables it to charge more for its private-pay services or to increase its Medicare census.

The connection between customer loyalty and increased revenue has been confirmed and explored in two books by Fred Reichheld, Loyalty Rules: How Today's Leaders Build Lasting Relationships and The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value. Reichheld has shown that customer loyalty is the mark of distinction for successful businesses in all industries and can lead to profitability. Although criticized in some respects, his books offer case histories of this involving such companies as Enterprise Rent-A-Car and Vanguard.

Within long-term care, there are three signs that your facility is meeting customer loyalty standards: growth of a waiting list, increased referrals from the local healthcare network, and increased staff retention. The last—staff retention—is crucial. It indicates that the facility or organization has taken the first steps absolutely necessary toward building customer loyalty and reduced the high costs of employee turnover. Specifically, it has addressed the needs of staff directly.

This means addressing staff's needs on an individual basis—giving each staff member respect and the training needed to do the job. Moreover, organizations are helping staff not only with their job goals, but also with achieving their life goals (additional education, for example). Finally, they are giving staff members autonomous job responsibility and then getting out of the way.

This last step, however, is where actual achievement of staff-engendered customer loyalty breaks down. Senior management must be absolutely convinced that this is the way to go. In many cases, unfortunately, they talk the talk, but they don't really believe it. Or at least they don't trust their employees sufficiently to make it work.

You'll note that this isn't just a matter of wages. There's no question that long-term care, particularly nursing homes, faces a structural impediment in reimbursement rates that makes it difficult to pay much beyond the $9 per hour for nurses' aides, housekeepers, and other frontline workers who are crucial to customer loyalty. This is a problem in that a significant portion of nursing home staff consists of single mothers who have difficulty making it on such wages. A facility or organization has to find ways to pay at least fair wages to its staff and offer benefits to the extent possible. An example of one long-term care company that walks this talk is Benchmark Assisted Living, which focuses on giving staff rewards both psychic and personal, and has seen it pay off in reputation and profitability.

The challenge of building customer loyalty through staff excellence goes beyond wages and benefits, however. It gets into the very business education that most of us, at least in this country, were given and grew up with. It might be labeled the “command and control” approach to business management: Orders originate at the top management level and are to be implemented, without serious question, by all other levels charged with executing them. For staff in this situation, the old saying applies: “Ours is not to reason why, ours is but to do and die.”

We are now learning that good businesses—truly successful, profitable businesses—don't work this way. Good business management is much more about coaching and mentoring than about command and control. I believe that an example is HCR Manor Care, widely considered to be the best large chain in the business, with outstanding quality of care and survey performance. Although I'm not as familiar with HCR Manor Care's inner workings as I am with some other organizations', I'd wager that it treats its employees well and gives them considerable autonomy in doing their jobs. It's not so much that HCR Manor Care's employees are smarter or more talented than anyone else's, it's that HCR Manor Care's employees are treated better. Illustrations of other companies turning “average” people into job performance stars can be found in Jeffrey Pfeffer's excellent book on the subject, The Human Equation: Building Profits by Putting People First.