by Jeff Sauro, author of “Customer Analytics For Dummies“
At first glance, it may seem like there’s no such thing as a “bad” profit. Isn’t the point of business to make money? Well, yes, but money obtained under negative circumstances brings with it some troubling baggage.
As a consumer, you’ve probably felt the weight of that baggage yourself when you:
– Paid the check at a restaurant after receiving terrible service and mediocre-at-best food
– Paid a cable bill for over a hundred channels, when you watch fewer than 20 of them on a regular basis
– Paid $150 to change your airline ticket reservation to a different flight
Yes, we’ve all been there. And while we handed over the money we owed, we certainly weren’t happy about it — and we definitely weren’t eager to repeat the experience.
When companies benefit financially from a bad customer experience, those are bad profits. The term ‘bad profits’ was coined by a customer loyalty guru named Fred Reichheld, who also developed the Net Promoter System.
Bad profits are like bad karma for companies. Sure, you get the sale now, but the bad experience, price, or product will come back to hurt you.
It just makes sense. In virtually all fields, customers have choices — and next time, they may choose your competition. Plus, it takes only a few seconds for a disgruntled customer to log onto a social media account and share with the world just why it shouldn’t do business with you.
Here’s how to handle bad profits:
First, figure out what percentage of your profits are “bad.”
Your company’s Net Promoter Score (NPS) is a useful tool to gauge what percentage of your profits are bad. If you aren’t familiar with NPS, it is based on the question “How likely are you to recommend [product or service] to a friend or colleague?” and is presented as a percentage. (“Customer Analytics For Dummies” explains how to compute your organization’s NPS.)
By combining your NPS data with customer-by-customer revenue data, you can estimate the amount of revenue derived from bad profits. This will be easiest if your product is sold for one price. When there are multiple products and prices, you’ll need to do a bit more work to match up customers’ attitudes with their historical revenue.
So, once you’ve done the math, how much revenue is too much from detractors — in other words, dissatisfied customers who are likely to talk negatively about your product?” While that depends on the industry and the switching costs — more competition leaves less room for detractors, for example — a common threshold is to obtain no more than 10 percent of revenue from detractors. In other words, if more than 10 percent of your profits are bad, you should work to eradicate them with a sense of urgency.
Next, uncover why these profits are bad.
Chances are, you already have some idea of why customers might be dissatisfied with your product or service. But it’s always a good idea to go directly to the source before making changes.
Survey your customers using open-ended questions about why they would or wouldn’t recommend your company and about what they think could be improved. Pay special attention to analyzing the feedback from your detractors. Their comments might not be easy for you to read, but they will help you gain an accurate understanding of what factors are driving your bad profits.
Identify the low-hanging fruit first.
After surveying your customers, you’ll likely have identified a variety of factors that might be driving your bad profits — and you may feel overwhelmed at the thought of addressing them all. That’s why I recommend going for the most obvious solutions first.
In other words, what is the one change that would make the most difference to the most customers? If you try to tackle too many changes at once you’re likely to get overwhelmed.
Consider these four common sources of bad profits:
Quality: Are your products and services high quality? Or are they unreliable and don’t work as expected?
Value: Customers don’t like to feel ripped off and like a bargain (some segments more than others). The price relative to what customers receive for their money can generate a lot of detractors or promoters, especially for business-to-consumer products and services.
Utility: Do your products offer all the essential features your customers need and value? A product doesn’t have to do everything, but it should do the right things for your customers.
Ease of Use: A product or website can have all the bells and whistles, but if it’s hard to use, or is a frustrating experience, the features might as well not work.
Then, figure out how to solve the problems you’ve identified.
Understanding the reasons why you’re earning bad profits and identifying the low-hanging fruit is (relatively) simple. Doing something about the information is usually harder because it often involves adjusting price, quality, and/or features to meet customers’ expectations. (But that’s usually what separates the best-in-class companies from the rest, points out Sauro: their ability to make changes based on data.)
Starting with your low-hanging fruit, then moving on to less-straightforward problems, figure out how to solve the issues that are leading to bad profits. This might involve revising existing policies and procedures or creating new ones. It might mean adjusting your pricing or making changes to your products. It might also involve empowering employees to take immediate action when they encounter a situation that might lead to bad profits.
For example, financial services firm Charles Schwab gives employees the ability to credit customers with free trades, and in some cases, even help offset losses. Charles Schwab understands that it doesn’t make sense to haggle over $100 (which would end up being bad profits) with a customer who has spent $10,000 over 10 years with the firm, and who will continue to spend more over his or her lifetime if a positive relationship is maintained.
Stop selling to perpetually dissatisfied customers.
What happens after you’ve addressed as many causes of bad profits as you reasonably can? How do you handle those detractors you just can’t seem to satisfy? While it may seem crazy, in some cases, getting rid of mismatched customers may better your reputation and increase your profits in the long run.
Realize that some people are simply determined to be unhappy, and that you may not be equipped to give others the product or service they need. In these instances, apologize for not meeting customers’ expectations and refer them elsewhere. Meanwhile, take a fresh look at your marketing and branding, and make sure that they are geared toward attracting customer segments that are a good fit.
Bad profits are a ticking time bomb. They lead to customer resentment and a decrease in customer loyalty, and eventually impact profits negatively. In today’s competitive market, you simply can’t afford those things — so be proactive about turning bad profits into good ones.
Jeff Sauro is a Six Sigma-trained statistical analyst and pioneer in quantifying the customer experience. He specializes in making statistical concepts understandable and actionable. He is the founding principal of MeasuringU, a customer experience and quantitative research firm based in Denver, Colorado, USA. He is an author of four books, includingauthor of “Customer Analytics For Dummies“.