HBR Highlights the Bad Profit Problem

More and more people are recognizing corporations’ addiction to bad profits—and the need to kick the habit. In the June 2007 edition of the Harvard Business Review, for instance, Gail McGovern and Youngme Moon highlight the addiction in an article titled “Companies and the Customers Who Hate Them.” The authors catalogue several of the sectors in which customer-unfriendly practices have become industry standard, including retail banking, rental cars, mobile phones, credit cards, and health clubs. They also point out that new entrants to these industries are rapidly gaining share by adopting customer-friendly polices.

Virgin Mobile USA, for example, has grown to almost 5 million subscribers. The company uses straightforward pricing policies, eschewing both long-term contracts and onerous cancellation fees. Virgin’s low customer churn and superior referral rates have accelerated its profitable growth. In retail banking, ING Direct has grown to more than $60 billion in deposits in less than six years. ING Direct does not follow standard banking practices of charging nuisance fees and offering complex products that cost more than they are worth.

In health clubs, similarly, Life Time Fitness has become one of the leading firms in its industry by offering 30-day money-back guarantees. That’s a sharp contrast to most competitors, who rely heavily on annual contracts. Since so many fitness-club customers drop out after a few months, annual contracts lead to a lot of wasted fees from the customer’s point of view.

While the article does a good job of highlighting the problem, it offers little in the way of practical solutions. By suggesting four questions companies should ask themselves, the authors imply that executives need a diagnostic to determine if their firm is guilty of bad profits. Presumably the executives would then discontinue the policies that generate bad profits.

In my experience, however, executives are well aware of profit-boosting tactics that infuriate customers. They privately admit that they are ashamed by policies that demean the Golden Rule. They are fully cognizant of the corrosive costs of such policies, both to customer loyalty and to employee engagement. They also recognize the competitive vulnerability created by the policies. Yet they feel trapped: without the bad profits, they would fail to meet the earnings targets demanded by investors.

To break out of this trap, companies should study the experience of Intuit. There, senior execs recognized that they could not afford to simultaneously address every policy frustrating to customers. So they recruited an “inner circle” of several thousand customers and asked them to vote on the most important items. An early vote, for instance, identified retail rebates as the number-one source of frustration, so a senior team examined the costs and benefits of a range of alternative solutions. In the end the company chose to revise its pricing strategy completely, eliminating all rebates.

Each subsequent period, the firm identifies the top customer issues and focuses its senior team on finding the best solutions. By systematically prioritizing and investing in economic solutions, the firm has found a practical way to kick the bad-profits habit. Every company that aspires to good profits and true growth should follow the Intuit example.

Please let us know if your firm (or one of your suppliers) has made progress in kicking the bad- profits habit.

Comments

[Kevin McDonald]

This is an interesting website - I was drawn to this while studying Verizon for an individual MBA project. I found that they refer to the NPS (Net Promoter Score) so it seems that they are at least interested in what the customer thinks and what their competition is up to.

Very intersting concept - to boil profits down in this way. Perhaps we may see Verizon allow carryover minutes someday?

KM