More and more people are recognizing corporations' addiction to bad profits--and the need to kick the habit. In the June 2007 edition of the Harvard Business Review, for instance, Gail McGovern and Youngme Moon highlight the addiction in an article titled "Companies and the Customers Who Hate Them." The authors catalogue several of the sectors in which customer-unfriendly practices have become industry standard, including retail banking, rental cars, mobile phones, credit cards, and health clubs. They also point out that new entrants to these industries are rapidly gaining share by adopting customer-friendly polices.
Virgin Mobile USA, for example, has grown to almost 5 million subscribers. The company uses straightforward pricing policies, eschewing both long-term contracts and onerous cancellation fees. Virgin's low customer churn and superior referral rates have accelerated its profitable growth. In retail banking, ING Direct has grown to more than $60 billion in deposits in less than six years. ING Direct does not follow standard banking practices of charging nuisance fees and offering complex products that cost more than they are worth.
In health clubs, similarly, Life Time Fitness has become one of the leading firms in its industry by offering 30-day money-back guarantees. That's a sharp contrast to most competitors, who rely heavily on annual contracts. Since so many fitness-club customers drop out after a few months, annual contracts lead to a lot of wasted fees from the customer's point of view.
While the article does a good job of highlighting the problem, it offers little in the way of practical solutions. By suggesting four questions companies should ask themselves, the authors imply that executives need a diagnostic to determine if their firm is guilty of bad profits. Presumably the executives would then discontinue the policies that generate bad profits.
In my experience, however, executives are well aware of profit-boosting tactics that infuriate customers. They privately admit that they are ashamed by policies that demean the Golden Rule. They are fully cognizant of the corrosive costs of such policies, both to customer loyalty and to employee engagement. They also recognize the competitive vulnerability created by the policies. Yet they feel trapped: without the bad profits, they would fail to meet the earnings targets demanded by investors.
To break out of this trap, companies should study the experience of Intuit. There, senior execs recognized that they could not afford to simultaneously address every policy frustrating to customers. So they recruited an "inner circle" of several thousand customers and asked them to vote on the most important items. An early vote, for instance, identified retail rebates as the number-one source of frustration, so a senior team examined the costs and benefits of a range of alternative solutions. In the end the company chose to revise its pricing strategy completely, eliminating all rebates.
Each subsequent period, the firm identifies the top customer issues and focuses its senior team on finding the best solutions. By systematically prioritizing and investing in economic solutions, the firm has found a practical way to kick the bad-profits habit. Every company that aspires to good profits and true growth should follow the Intuit example.
Please let us know if your firm (or one of your suppliers) has made progress in kicking the bad- profits habit.
Kevin McDonald
says:
We would like to highlight how one of our clients, Mellon Investor Services, has deployed a Voice of Customer practice, built upon the Net Promoter discipline, to become addicted to good profit by transforming their client base into advocates who drive growth.
In a nutshell, Mellon needed to win new customers and grow revenue in a highly commoditized market place that was shrinking 3-5% each year. Mellon recognized that they needed insights on how they could differentiate within their market. Mellon already had systems in place which allowed them to track customer satisfaction, but their data gave them no actionable insight to be able to predict the willingness of their customers to recommend/refer or likelihood to purchase additional services. Mellon was looking for causal linkages of what drove customer behaviors beyond just the measure of satisfaction. Mellon launched an NPS initiative to help uncover the key drivers behind a customer's willingness to recommend and its impact on profitability and growth.
To Fred's point, Mellon could have easily explored contractual vehicles that created bad profits. Instead Mellon looked for the levers and dials they could control to create advocates to drive customer retention, repurchase and referrability. The company realigned around the Net Promoter methodology and put customer insight at the center of their decision making process and have successfully defined the actionable levers they could control to increase loyalty and drive growth. This led to many process changes within the company and like Intuit, has created an environment that enables Mellon to have more action-oriented, open conversations with their clients and thereby improving the quality of their relationships.
One of the key aspects of Mellon's Net Promoter program was the quality of the verbatim comments that they have been gathering via NPS. They found that there was something magical about the nature of the "recommend" question that got their customers willing to offer meaningful verbatim responses to the "why did you vote that way" follow up question. With these verbatim comments in hand, Mellon formed an executive council who reviews the data from their customer listening posts on a monthly basis. This council works to identify key trends, create actions around what their customers had to say, and more importantly, closed the loop with their customers as to the actions they planned to take. As a result of this process, Mellon discovered that in a commoditized market, where "product innovation" is difficult, you can create meaningful differentiation by creating an environment where you bring your clients into the decision making process. By asking, listening and then acting they found themselves actually changing their product and services to best meet their customer's needs—which in the mind of the customer created a customized and differentiated offering. Pure satisfaction research never created the opportunity to create the dialogue that facilitated this degree of impact. Further details of the Mellon Investor Services case study can be found at http://phelongroup.com/clients/success.htm.