The Profitability of Dissatisfied Customers

One of the most influential propositions in marketing is that customer satisfaction begets loyalty, and loyalty begets profits. Why, then, do so many companies infuriate their customers by binding them with contracts, bleeding them with fees, confounding them with fine print, and otherwise penalizing them for their business? Because, unfortunately, it pays.

So says Gail McGovern and Youngme Moon in the June 2007 issue of Harvard Business Review.
This paper lays out how companies in the cellular phone, credit card and retail banking industries systematically bilk customers out of large sums of money for breaking rules that were never clear from the onset.
Here are a few examples:

• Many credit card issuers don’t deny a transaction that would put the cardholder over his or her credit limit; it is more profitable to let the customer overspend and then pose penalty.
• Most cellular phone companies offer several dozen pricing options, ranging from low-priced plans with limited number of minutes to high-priced plans that come with thousands. Each plan has its own restriction and allowances. It is difficult for customers to know which one fits their needs forcing them to pay for more minutes than they need or pay high penalties. It is estimated that as much as 50% of U.S. carriers’ income comes from overage and underage fees.
• Most banks tally up customer accounts at the end of the day. Some debit checks in order of size—biggest first—rather than chronologically. This increase the chance some checks will bounce and the bank can levy penalties. Consumers paid $53 billion in overdraft fees in 2006. This is a 58% increase over 2001.

Now here’s a shocker!

In almost every case, the executives we’ve spoken to have expressed discomfort with the practices, acknowledging them but arguing that they don’t represent intentional strategy. Almost, uniformly, they describe a largely unconscious process of uncoordinated implementation. The punitive fees and restrictive contracts evolved gradually, with each value-extracting addition only slightly more company centric that the one that preceded it.

If these actions are not intentional—how did they happen? Clearly, the pursuit of profits, rising stock prices and bonuses override any efforts at being customer-centric. It is interesting to note in all of these industries many of the companies have executives responsible for the customer experience or customer care. This is disheartening
There is, however, room for optimism. The authors point to customer-centric newcomers have quickly gained market share and customer mindshare.
Here are two examples
In retail banking ING Direct has taken a customer friendly stance offering products that are easy to understand and that don’t have predatory fees. ING Direct is adding 100,000 new customers per month and in less than 6 years has become the 4th largest thrift bank in the USA.
Virgin Mobile USA entered the already crowded US cellular phone market in 2002. Their strategy—offer a pay-as-you-go pricing plan with no hidden fees, no time of day restrictions, no contracts and straightforward rates.
With comparatively small marketing budget Virgin Mobile USA attracted 1 million customers in record time. And, growth keeps happening. Their churn rate is far below the industry average so they don’t have to aggressively pursue replacement customers.
Their big advantage—customers are evangelists! More than two-thirds of their customers report that they recommend the service to friends and family.
What other companies or industries are fleecing customers? What other companies are offering customer-friendly alternatives?