Bad profits vs good profits

Business research by Bain & Co. shows that just a five per cent increase in customer loyalty can yield anywhere between 25 per cent to 100 per cent improvement in profits.

Business research by Bain & Co. shows that just a five per cent increase in customer loyalty can yield anywhere between 25 per cent to 100 per cent improvement in profits.

An accountant friend of mine recently retorted, “Bad profits! Whatever are you on about Kevin? In any business there are profits or losses, period. Any profit is good profit”. You can’t argue with his logic but this (with all due respect) is a very narrow and short-sighted understanding of business. Allow me to explain: There is a huge difference between “bad profits” and “good profits”. True: Far too many companies can’t tell the difference between good profits and bad. Also true: The income statement of a company cannot distinguish between good profits and bad. But this doesn’t mean that “bad profits” don’t exist.

By “bad profits” I mean profits earned at the expense of customer relationships such as when a customer feels like he has been misled, mistreated, ignored or taken for granted. According to well respected business research (Reicheld: 2006), on average, firms have more than 30 per cent of their profits coming from “bad profits”.

So what I hear you say? Well, these sort of customers are just itching to bad mouth your product, damage your reputation and switch to the competition while at the same time taking with them, on average, three or four of your customers with them!

Let me mention some examples: You buy a bottle of wine or a six-pack of beer from somewhere which is open after normal working hours and on your way to a dinner party, knowing full well that the shop is ripping you off. Sound familiar? Or you buy an appliance which goes bust one week after your guarantee expired and the seller explains that it can’t be fixed and you need to buy a new one.

You buy artery chocking, high salt, high sugar, fast-food because you don’t have the time to cook. You are on the wrong mobile phone package (paying too much) but you haven’t got the time to look into it and your service provider doesn’t bother. You choose to fly an airline because it is the only one that can get you to a particular destination on a specific day; the customer experience is poor but you had no choice. This is what I mean by “bad profits”.

So when does a business earn “good profits” I hear you ask? Simple: When it delights its customers and by doing so customers become loyal to your brand and can’t stop talking you up and recommending you to friends and family, which reduces the need for expensive advertising and sales promotions for instance.

If you are still not convinced, how about this: Business research by Bain & Co. shows that just a five per cent increase in customer loyalty can yield anywhere between 25 per cent to 100 per cent improvement in profits (“good profits” that is). Or, and looking at it inversely, the cost of negative comments equates roughly to the need for a business to generate five positive customer comments for every negative one.

Work it out: This means that for every detractor-customer that bad-mouths your product or company, four other people have heard of your “alleged bad service/product” and that single detractor-customer alone effectively neutralises the 20 positive comments you worked your heart out to win. That is the impact of “good profits” and “bad profits”. Granted, a company’s financial accounts can’t distinguish between good and bad profits and as a result they just focus on the quantity of profits rather than the quality of those profits. But accounts are for accountants and tax officers not for businessmen (I am part-jesting here. I love accountants and I adore tax officers really).

Back to the point I was trying to make: The first important change of mindset a business must embark on is the self-admission that “bad profits” do exist and that they are bad for business. Allow me to make an analogy: A smoker, an alcoholic or a junky must first admit that s/he is addicted to cigarettes, booze or drugs before one can start to fight the addiction and rehabilitate that person.

Similarly, a business must first admit that it is a “bad profits” junkie or has a dependency on “bad profits”, and only then can it start to focus its attention on acquiring more and more “good profits” and eliminating “bad profits”.

How? Now that is a good question. It requires a long-term commitment by top management and a change of mind set. First, the customer must really be at the heart of your business. A customer-centric organisation is not just a buzz word but a way of organising and managing a business. You also have to train and empower front-line employees.

Second, you have to measure customer satisfaction and customer loyalty. Third, you have to have different strategies for different customers (invest in the ones that provide you with “good profits”). Fourth, listen very carefully and frequently to your customers.

This all requires building the right business processes, the right systems (e.g. customer complaint handling), training front-line staff appropriately, ensuring top management commitment and a culture of “continuous improvement”. I won’t lie, it is hard work but it will give you real and sustainable competitive advantage and customers won’t defect to the competition when your price is higher than the competition or when aggressive new entrants start to challenge your position in the market. Alternatively, you can remain addicted to “bad profits” and pay the price in the medium term. “Bad profits” for you and “Good profits” for the rest of us!

Mr Fenech is managing director at Fenci Consulting Ltd.

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