Profits, good and bad

| Updated on: Oct 23, 2011
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Say ‘profit,' and it perhaps sounds cool and makes you feel good. It can, therefore, be disturbing to open ‘ The Ultimate Question 2.0 ' (Harvard) and find Fred Reichheld discuss two types of profits, viz. bad and good. In his view, good profits are earned with customers' enthusiastic cooperation, when the company so delights its customers that they willingly come back for more – and not only that, they tell their friends and colleagues to do business with the company. In contrast, bad profits are earned at the expense of customers, the author rues. Bad profits, he notes, choke off a company's best opportunities for true growth, the kind of growth that is both profitable and sustainable. Acknowledging that accountants cannot tell the difference between good and bad profits – because all those dollars look the same on an income statement – Reichheld observes that bad profits are easy to recognise even when these do not show on the books.

Whenever a customer feels misled, mistreated, ignored, or coerced, profits from that customer are bad, he explains. Among the many examples of bad profits mentioned in the book are financial services firms which like to throw around terms such as ‘fiduciary' and ‘trust' in their advertising campaigns while little deserving those monikers; mutual funds which bury their often exorbitant administrative fees in the fine print so that customers would not know what they are paying; brokerage firms slanting their research to support investment-banking clients, thus bilking their stock-buying clients; and retail banks charging astounding fees for late payments or bounced cheques.

Pursuit of ‘bad'

The author cites many instances of how ‘bad' is actively pursued by businesses. Most airlines change their prices frequently – often by hundreds of dollars – so nobody can know what the ‘real' fare is, he cautions. “Banks develop algorithms that process the largest cheques first each day, so that depositors will be hit with more insufficient-funds penalties. Many mobile-phone operators have created pricing plans that cleverly trap customers into wasting prepaid minutes or incurring outrageous overages.”

The damage caused by bad profits is because of the detractors they create, informs Reichheld. He defines detractors as customers who feel badly treated by a company – so badly that they cut back on their purchases, switch to the competition if they can, and warn others to stay away from the company they feel has done them wrong.

Detractors do not show up on any organisation's balance sheet, even while costing a company far more than most of the liabilities so carefully tallied by traditional accounting methods, the author alerts. For, customers who feel ignored or mistreated find ways to get even. How so? They drive up service costs by reporting numerous problems, one learns. “They demoralise frontline employees with their complaints and demands. They gripe to friends, relatives, colleagues, acquaintances – anyone who will listen, sometimes including journalists, regulators, and legislators. Detractors tarnish a firm's reputation and diminish its ability to recruit the best employees and customers.”

Too critical a read to be ignored, despite its alarming messages.

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Published on October 23, 2011

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