The Hindu Business Line : Good profits, bad profits

How can a company position itself on the path to progressive growth — the kind of growth that enables its customers to enjoy doing business with it; and makes those customers sing the company’s praises to their friends? Of course, this is only the kind of growth that can be sustained over a long time.

Conversely, other strategies, such as aggressive pricing, new sales campaigns, or mergers and acquisitions may also give a company a well-deserved boost in business. But unless such gambits end up creating customer delight, the growth will not last.

So it is with market share. Often, a dominant position in the market place gives a company a clear edge over the competition. Again, unless that advantage is converted into enduring customer satisfaction, the dominant share will not last long. There is no doubt, however, that every company ought to delight its customers. The crucial issue is how to make a company realise what its customers are feeling about their experience with the company; and how the company can establish accountability for the customer experience. Conventional “satisfaction surveys” do not seem to serve the intended purpose. They ask too many questions and generate too little useful information. Financial reports are, in any case, not designed to meet this purpose.

New index

What is warranted in this context is a wholly new kind of index — an index that will focus the energies of the organisation on improving the experience of every customer, everyday. While profitability needs to be a fundamental objective for a commercial organisation, the ethics and values governing the means and methods by which such profitability is achieved are equally important from the viewpoint of the society in which that organisation operates.

Fred Reichheld advocates a new theory that distinguishes ‘Good Profits’ from ‘Bad Profits’. Accountants cannot read the difference between good profits and bad profits. They all look the same on an income statement. While bad profits are not reflected on the books they are, however, easy to recognise. They are profits earned at the expense of customer satisfaction. Bad profits arise when companies save money by delivering a lousy experience.

Whenever a customer feels misled, mistreated, ignored, or deceived, then profits made from that customer are bad. When a salesman pushes an overpriced or inappropriate product to a gullible customer, that salesman is generating bad profits.

When sales campaigns dupe customers by inflating the price range, or by masquerading inferior products as good quality in the rush for purchase during a festival season, such schemes are creating bad profits. If bad profits are earned at the expense of customer satisfaction, good profits are earned through customer cooperation.

A company earns good profits when it pleases its customers to such an extent that they want to come back for more; and not only that, they tell their friends and colleagues to do business with that company.

Customer marketers

Satisfied customers, in effect, become part of the company’s marketing force and they function as valiant spokespersons for the company and its products.

On the other hand, customers who feel badly treated by a company, thereafter avoid purchasing from that company; and they not only switch to the competition, but also warn others to stay away from that company.

Today, the negative word of mouth goes out over a global broadcasting system. In the past, the marketing maxim was that every unhappy customer told ten friends. Now, an unhappy customer can tell ten thousand people, thanks to the Internet.

It is because the pursuit of profit always dominates corporate agenda that the rationale for building sound customer relationships gets lost in the shadows. No wonder, Theodore Levitt wrote in sheer despair: “Industry is a customer satisfying process, not a goods producing process.”

(The writer is a Chennai-based management consultant.)