When companies don’t understand the difference between good and bad profits, growth suffers, and you lose customers, thus recurring revenue.
What is bad profit?
Fred Reichheld in his book The Ultimate Question says “Whenever the customer feels misled, mistreated, ignored, or coerced, profits from customers are bad. Bad profits come from unfair or misleading pricing. Bad profits are about extracting value from customers, not creating value. When sales reps push overpriced or inappropriate products onto trusting customers, the reps are generating bad profits. When complex pricing schemes dupe customers into paying more than necessary to meet their needs, those pricing schemes are contributing to bad profits.”
Bad profits are those profits that might increase revenue but at the expense of the customer experience.
An example of bad profit is this is the story of a major car rental company in the US. Most car rentals have a 59-minute grace period for the customer to return the car before they are charged another days hire.
Some clever person in their business noticed a large number of customers who returned cars between 30 and 45 minutes after the car was due to be returned.
Knowing this, the company changed the grace period to 30 minutes. Thinking they would be able to make a lot of money from late returns.
Rather than making an announcement for the change to their customers, the company placed a sign on the service counters only. Within 2 weeks the impact was felt. 6 of their largest clients threatened to sack them if they did not change this rule.
The point is bad profit impacts the customers experience and therefore your customer loyalty.
What is profit?
The basic understanding of profit is when you add total revenue minus all the expenses, costs, and taxes to earn it. Revenue is only the money gained from sales of goods and services.
Is making profit a bad thing?
No, it’s good, as when you make a profit you are earning more than the expenses to sell it.
The advantages of profit are:
- Increase retained earnings.
- Accumulated net profit increases the value of the business if sold.
- Increased likelihood of borrowing money from financial institutions
- Provides cash flow to grow the business.
How do you know if you are delivering bad profits?
You cannot spot bad profit by reading a financial statement, the numbers for ‘good’ and ‘bad’ profits are all combined on one line. But, in the long run, the two take organisations in opposite directions.
Bad profits are a lot like strip mining. They produce results that look fine when judged in an isolated short-term financial context. Sales are made; money drops to the bottom line. But while the short-term gains are attractive, the long-term implications are hurtful.
We have seen some very good examples of this in Australia recently with the impact on indigenous history, which created some bad media.
You need to have a way of assessing your customers experience plus your stakeholders and staff.
Take staff for example. You can make more profit by paying low wages, offering few benefits and making work conditions difficult. As well as showing no love or respect for your team.
This will save money and drive more profit in the short term. But long-term, having an unhappy and disengaged workforce will impact your customer’s experience.
Who wants to be serviced by staff who hate their jobs?
If you want to have engaged employees, you need to take the time to set your team up for success. And you need to do this every day.
Turnover of both staff and customers will increase. This is the thing about bad profit, you don’t see it immediately. It takes time but then is devastating and it takes a long time to fix.
Customer loyalty can take years to gain and seconds to lose.
Using the Net Promoter Score System to identify your customer and team feedback is one great way of doing this. You want promoters not detractors of your brand.
We have an emotional bank account with our customer and staff.
What is an emotional bank account and how does it relate to good and bad profits?
Dr. Stephen R. Covey, the author of The 7 Habits of Highly Effective Families®, defines an emotional bank account as one’s relationship with another.
He explains the concept of an emotional bank account with a metaphor. “By proactively doing things that build trust in a relationship, one makes deposits”.
There are six major deposits we can make to the emotional bank account:
- Understanding the individual.
- Attend to the little things, which are the big things in relationships.
- Keep commitments.
- Clarify expectations.
- Show personal integrity.
- Apologise sincerely when you make a withdrawal.
Even the most loyal person will go once the withdrawals build up, especially when the deposits don’t. This is true to all parts of our lives.
A good profit gives value to your customers and a good profiting business has loyal customers and raving promoters.
Good profit benefits both the customer and the business. This occurs when a business creates value to the customer, and they keep coming back for more.
These customers tell their friends and family to also do business with you. They become your promoters and create good profit for the company and create growth that is sustainable.
The key is to perform an overall evaluation of your business and identify the areas that bring harmful returns. Then create the steps to change and improve those behaviours.
Re-evaluating the business and making changes whether big or small, will bring in good profits. And ensure you are in business for a long time to come.