Museums aspire to lofty ideals and those who work in and for them know, without hesitation, that they create lasting value for society. But, until now, lofty ideals and lasting value have been perpetually difficult to quantify. Now new research points to a powerful new measure that will allow us to say with some certainty that we are achieving our goals.

According to Frederick F. Reichheld’s The Loyalty Effect, customer loyalty and retention rates explain business performance better than market share, scale, unit cost, or earnings measures. Reading his lucid book, I couldn’t help think that the loss of members and volunteers rarely appears on the radar screens of the museum directors I know. Maybe it should. Here’s why.

When intellectual capital is critical to operation, financial and loyalty measures together provide balanced indicators to the organization’s long term health. For example, if museums typically loose 10 percent of their members annually and replace them with a new ten percent, no growth results. If, on the other hand, you retain half of your anticipated loss and work hard to keep gaining the projected new 10 percent, you increase your member base by 100 percent in fourteen years. But wait, there’s more, much more.

Customer loyalty can’t be had without staff loyalty. Consistently high customer retention creates unexpected bonuses in employee and volunteer morale and productivity, and it can even reduce the cost of capital. The relationships employees and volunteers build with visitors and members stimulate visitation, cost savings, referrals, premium purchasing, and long-term donors. Moreover, those relationships increase investment in the business world according to Reichheld’s research, and we have anecdotal evidence that the same holds true for nonprofits.

A nice, bold black bottom line is indispensable for a nonprofit, but it is also a consequence of creating value. Creating value requires sustainable improvements in performance, measured and predicted through understanding customer, employee, and investor loyalty. Reichheld calls retention the central gauge that integrates all the dimensions of an organization, and its measurement can predict how well a museum creates value for its visitors, members, donors, and community.

The business statistics shocked me. Customers typically defect at a rate of 10 to 30 percent per year, employee turnover is commonly between 15 and 25 percent, and investor churn exceeds 50 percent! Some businesses can improve productivity by 20 percent by retaining only 5 percent more customers. My own research into this area in museums is just beginning, but I bet we experience much higher retention rates, another indicator that business has a lot to learn from the nonprofit sector.

It’s intriguing to note that in Reichheld’s model, nonprofits lead the business world in the most important aspectmission. He sees building customer loyalty as the fundamental mission of a business and as a means to profit. Improving customer acquisition, hiring and motivating and retaining employees, and building better investment and governance structures are all part of an integrated approach resulting in and from loyalty-based management. He emphasizes loyalty as the measure of value; not the goal.

Forces of Loyalty
If the loyalty-based model holds for museums (and I’m willing to bet it does), loyalty and value link to sustainability and permeate the operation, creating positive economic effects:

• Qualifying and acquiring members and guests who value and appreciate your mission builds repeat visits, sales, and referrals. Concentrating investment on selected customers improves loyalty and further stimulates sustainable growth. The danger, of course, is that if the mission is too narrow to attract a diverse audience, it may not be large enough to support the operation.

• Sustainable growth enables the museum to attract and retain better employees. The opportunity to design and deliver superior value to a chosen community increases staff satisfaction.

• As staff learn about the museum’s operations and align financial with other constants, they can reduce cost and improve quality. Exhibition teams, for example, can get more efficient, as can educators, registrars, and maintenance staff.

• Nonprofits rarely discuss the efficiency of their products, but they should. I believe they can generate a sustainable, reinforcing advantage if they talk publicly about it. As staff and volunteers learn how to get more efficient and as boards and executives commend and reward efficiencies, productivity can spiral upward.

• Loyal donors behave like partners. They can fund investments, lower the cost of capital, and ensure cash flow. If they have been with the museum, perhaps through a period of red ink, they have perspective that others in the inner circle lack.

In Search of Failure
Organizations don’t study their own failures for two reasons. The first is embedded in the nature of bureaucracy and the second has to do with our very American fixation on success. If something goes wrong, the systems closes in upon itself, protecting the hierarchy. If things get really bad, a scapegoat is identified to take the heat and everything else continues as per normal.

The study of failure may intuitively fit into your personal world view even though you may not practice it at the museum. Think a minute. What taught you more? Your successes or your failures? Looking at our failures is painful, personally and organizationally. But, as systems analysts know, you can’t learn much from a system that is working well. When everything hums along it is difficult to say why. Only when it breaks down, the squeak or wheeze or lurch calls attention to the symptoms, produces a diagnoses, and initiates repair.

So, if retention rates are an indicator of success, study your failures. When is the last time you probed a member who defected? Or asked a volunteer who stopped volunteering why? Who can teach you morehappy campers or those who haven’t darkened the museum’s door in three years?

Reichheld’s book speaks at length about the choosing the right customers, the right employees, the right investors, the right measures, and learning from failure. His arguments are compelling. I can imagine museums applying the disciplines of loyalty-based management as fundamental to creating and sustaining the learning organizations to which so many of us aspire.

Frederick F. Reichheld, The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value, Harvard Business School Press, 1996. 323 pp. $24.95