BAD Profits

The basics - BAD Profits

Wednesday, February 27, 2013

By now, most of you following this blog would have known what NPS or net promoter is. To refresh, it is based on one question – on a scale of 0 to 10, how likely are you to recommend my company, my service or my product to you friend or a colleague? Customers rating 9 to 10 are Promoters while the ratings of zero through 6 are Detractors. NPS is % Promoters minus % Detractors.

While thousands of companies have jumped the bandwagon to try the latest and the greatest initiatives like NPS, sadly not many have truly benefitted the real value of implementing the system. Many companies are merely measuring NPS and do nothing about it. NPS is a management gauge to tell how a company is doing. It is like a speedometer that tells the speed of your vehicle and as the driver you will need to act if you want to change that speed. 

When understood well, management will be able to identify key drivers that affect the loyalty of customers and develop plans to improve that. Additionally for quick learning and recovery, companies need to use the dynamic customer feedback to coach the front line employees and take this as an opportunity to engage customer that is disgruntled.

The other less known benefit of NPS, perhaps the fuel to generate more promoters and lesser detractors is in a company with NPS implemented effectively identifies and eliminate “bad profits”.  Bad profits are gained by extracting value from a customer. Profits that are acquired unethically but by legal means such as contract fine-prints, long term and confusing contracts that traps customers are bad profits. In short, whenever customer feels they are coerced, misled or cheated, the product is a bad profit. 

Bad profits create more detractors who diminish the value of a company by increasing the cost of serving them such as complains, false claims and generate negative word of mouth that increases the acquisition cost of new customers. Some of the examples of bad profits are exorbitant late payment charges, unbelievable hotel phone or internet charges, (extra) baggage charges and trapping customers on long term contract with poor service. 

On the other hand, “good profits” are profits delivered by creating value to customers. These are profits that made by making customers feel good and they would want to come back again, on their own. Many profits are usually good profits where a fee is paid in an exchange of a product or a service. The issue is when companies take advantage of customer by over-charging, dubiously add extra fee to mislead customer. 

Though it is not possible to know what composition of a profit is good profit and bad profit from the accounting system, it is not difficult to know them. The guiding principle to know the difference between the good and bad profit is the Golden Rule – Treat others as you would want them to treat you. Use your conscience to ask if you would want someone do what you are doing to your customer. If your answer is a resounding “no”, then you would want to eliminate such fee or task, gradually if not immediately.

Can you identify “bad profits” in your organization?

Satya Narayanan