Bad Profits
Most companies can boost short-term profits by exploiting customer relationships by raising prices whenever they get away with it. Or they can cut back on services or product quality to save costs and boost margins. Instead of focusing on innovations to improve value for customers, companies can boost bad profits by channeling their creativity into finding new ways of extracting value from customers. But no company can do that and achieve sustained growth, because their customers will be converted into detractors. The following examples of bad profits are drawn from Fred Reichheld's book, The Ultimate Question.
Financial Services: Mutual funds bury often-exorbitant administrative fees in the fine print, so that customers won't know what they're paying. Brokerage firms slant their research to support investment-banking clients, thus bilking their stock-buying clients. Retail banks charge astonishing fees for late payments or bounced checks. Banks also develop algorithms that process the largest checks first each day, so that depositors will be hit with more insufficient-funds penalties.
Healthcare: Hospitals, Pharmaceutical Companies, HMOs: Many hospitals won't reveal the deals they have cut with insurance companies. Many insurers do their best to exclude people who might actually need the coverage - and if you do have coverage, they drown you and your doctor in complicated paperwork. Many pharmaceutical companies pay doctors to push their drugs, while quashing studies suggesting that a potentially lucrative new drug may be ineffective or dangerous. Many HMOs promise to provide cradle-to-grave coverage, yet balk at paying for many procedures their physicians recommend.
Mobile Phone Operators: Most mobile-phone operators have created pricing plans that cleverly trap customers into wasting prepaid minutes or incurring outrageous overages. One mobile-phone operator calculates that proactively putting customers in the plan that was best for them would cut profits by 40%. Providers also lobbied to restrict the portability of phone numbers. In their efforts to trap customers, they ensured that customer loyalty would decline and that they would lose the potential to expand their tarnished brands into related markets.
Travel - Airlines, Hotel, Rental Cars: Most airlines change their prices hundreds of times a day, so nobody can know what the "real" fare is. Numerous airlines have repeatedly used their market power to raise prices, sometimes to levels that can only be described as price gouging. Travelers must pay most airlines $100 to change a ticket and $80 for an extra piece of checked baggage. If they use a hotel phone, they may find they have run up charges larger than the room rate. If they return most rental cars with less than a full tank, they will be charged more than triple the market price for the fill-up. They have the option of buying a full tank at the beginning of the rental but get no credit for unused gas.
