The following post originally appeared on LinkedIn.
Too many companies these days are addicted to bad profits.
Bad profits choke a company’s growth. They blacken its reputation and make it vulnerable to competitors. The pursuit of bad profits alienates customers and demoralizes employees.
But wait, you say, how can profits, that holy grail of the business enterprise, ever be bad? Short of outright fraud, isn’t one dollar of earnings as good as another?
Bad profits are not easy to spot on an income statement. But outside the world of accounting, they’re easy to recognize: They are profits earned at the expense of customer relationships.
Whenever a customer feels misled, mistreated, ignored or coerced, profits from that customer are bad. As my colleague Rob Markey and I explain in The Ultimate Question 2.0, bad profits come from unfair or deceptive pricing. Bad profits arise when companies shortchange customers by delivering a lousy experience. When sales reps push inappropriate products onto trusting customers, the reps are generating bad profits.
Examples, unfortunately, are everywhere. Airlines that charge $100 to switch flights when you arrive at the airport in time to catch an earlier departure—even when that flight has empty seats. Inscrutable wireless phone bills with huge overage charges or outrageous roaming fees that bear no relationship to network costs. Rental car companies exacting exorbitant fees if you fail to top off the tank. Adjustable mortgages that never should have been underwritten. Administrative fees buried in the fine print of mutual funds. Health insurers that balk at procedures their own network physicians recommend.
Bad profits work much of their damage through the detractors they create. Detractors are customers who feel badly treated by a company. And they’re expensive. They buy less. They demoralize frontline employees with complaints and demands. They gripe to friends, relatives, colleagues, acquaintances. Estimates vary, but for a long time, the accepted maxim was that every unhappy customer told 10 friends.
No wonder bad profits strangle a company’s growth. If many of your customers are bad-mouthing you, how are you going to get more? If your customers feel mistreated, how will you persuade them to buy more from you? Right now, churn rates in some industries have deteriorated to the point where a company may lose half of its new customers in less than three years.
Customers resent bad profits—but CEOs and investors should, too, because bad profits undermine a company’s prospects. Like the addicts they are, enterprises dependent on bad profits have no future until they can break their habit.