Hooked on Bad Profits…All the Way to the Slaughterhouse

I’m a big fan of Fred Reichheld. I don’t always agree with him; for example, I categorically dispute his claim that the Net Promoter Score is the “ultimate” measure of customer loyalty. Yet, on many topics I think his observations are right on the mark.

Take the topic of “bad profits.”In his book, The Ultimate Question, Reichheld asserts, “too many companies these days can’t tell the difference between good profits and bad. As a result, they’re getting hooked on bad profits.” Bad profits are those earned at the expense of customer relationships. Reichheld elaborates:

“Whenever a customer feels misled, mistreated, ignored, or coerced, then profits from that customer are bad. Bad profits come from unfair or misleading pricing. Bad profits arise when companies save money by delivering a lousy customer experience. Bad profits are about extracting value from customers, not creating it. 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….and customers who are the victims of bad profits find ways to get even.”

I’ll bet every one of you reading this blog has been victimized by at least one company hooked on bad profits.

Spirit Airlines is the most profitable airline in America. It also is the one most hated by consumers. Why? The number one reason, according to a recent study conducted by the airline itself, is fees for “options and extras.” Spirit relies on basic airfares for only 61% of its revenue. The remaining revenue comes from charges for carry-on bags, checked bags, seat assignment requests, in-flight food and beverages, changes or cancellation of reservations, and an assortment of other “optional services.” Flyers who are familiar with Spirit’s policies and pricing schemes, know what to expect and what they can do to minimize paying such fees. In the end, however, it is almost a certainty that Spirit customers will pay more than the advertised ticket price.

Spirit is making money. It is unlikely they will stop extracting fees from customers anytime soon. Spirit is a company hooked on bad profits. Of course, other airlines also are generating bad profits from passenger fees. Customers see and react to what is happening: It should come as no surprise that the average score for airlines on the American Customer Satisfaction Index is among the lowest of all industries.

The airline industry is not alone when it comes to being hooked on bad profits. Wireless communication service providers, along with companies that furnish home security systems and monitoring services, are notorious for extracting bad profits from customers. They frequently lock customers into long-term contracts, and then when a customer wants to cancel because the service is poor or not as promised, she is told that such cancellation is possible, but that she still must pay the balance of the contract. In effect, the company is saying, “you will no longer receive the services we promised to provide, but you still have to pay for them.” How about that for bad profits?

It seems that bad profits are frequently seen in industries and markets where customers have limited options, such as airlines. Companies in these industries may experience some customer churn, but for the most part, people continue to buy and use the services of these companies because they have few, if any, other choices. What happens, however, when new options become available to customers? More often than not, customers take their long-awaited opportunity to get even. Reichheld cites one example:

“For a while, US Airways dominated the Philadelphia market. The company’s fares were high and its service mediocre, but the routes into and out of Philadelphia were highly profitable. Then Southwest Airlines entered the market with lower fares. US Airways dropped its prices to match Southwest’s, but travelers flocked to the new carrier anyway—they had had enough.”

Cable companies dominated the subscription television service market during the 1970s and 1980s. They were known for providing poor service to many customers, but those customers had no other place to go if they wanted to continue receiving anything other than over-the-air, network programming. Along came satellite-based subscription television service providers, and suddenly, the cable companies were scrambling to stop customers from leaving in droves. Today, Internet protocol television service providers have emerged and are taking a big chunk of market share from both cable and satellite companies. The latter are finding that they must re-price their services to attract, retain, and improve the value they provide their customers.

Oh, and did I mention that the average score for cable and satellite service providers on the American Customer Satisfaction Index is among the lowest of all industries?

“Pigs get fat, hogs get slaughtered.” This wonderful expression often is used to convey the idea that those who work hard will get what they deserve, but those who try to gain something for nothing will not get very far. Billionaire entrepreneur and investor Mark Cuban recently used this expression to describe the National Football League. Questioning the wisdom of the NFL’s planned television expansion, Cuban said, “I’m telling you, pigs get fat and hogs get slaughtered…and they’re getting hoggy. When you’ve got a good thing and you try to take it too far, it always, always, always, always, always turns on you. When you try to take it too far, people turn the other way, that’s the number one rule in business.”

The moral of the story is this: Companies that rely on bad profits are setting themselves up for a major letdown. Consumer backlash may be delayed, but it is almost always inevitable. Sooner or later, those consumers will demand—and get—the value they’re seeking. Of course, I fully expect that some companies will continue trying to thrive on bad profits…and they will do so all the way to the slaughterhouse.

I’d love to hear your thoughts. Does your company charge customers for things that don’t really deliver value to those customers? Is there a way to replace bad profits with revenue based on providing customers with real value? Share your comments below.