Good and Bad Profits, and their impact on customers

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By: Wise Marketer Staff |

Posted on January 26, 2006

Companies earn 'bad profits' from one-third of their customers, stifling long-term growth, according to research from Bain & Company. But by contrast, those that deliver superior customer experiences more than double their industry growth average, the company says.

What Bain & Company calls 'bad profits' are those generated by a company's failure to deliver on a promise, where the company deceives a customer or takes advantage of their inability to switch to a competitor's services, reaping rewards at the customer's expense and creating a detractor in the process.

Companies dependent on bad profits for growth demonstrate low 'Net Promoter Scores' (NPS), the company says. NPS is the percentage of customer promoters (i.e. those who are likely to recommend the company to friends and colleagues), less its detractors (i.e. those who express low ratings when asked if they would recommend the company to friends and colleagues).

Customers as liabilities?
"Companies are strangling their growth prospects by converting a third of their customers into liabilities, which is the direct result of booking bad profits from these customers," said Fred Reichheld, Bain & Company's loyalty expert and author of the forthcoming book, The Ultimate Question: Driving Good Profits and True Growth. Reichheld says that the average company's customer balance sheet now contains almost as many detractors as promoters.

In his book and research, Reichheld reveals that companies can best achieve customer growth in the long-term by asking customers one simple question: Would you recommend us to a colleague or friend?

A new approach
According to Bain's analysis of more than 100 companies across 25 industries in the USA and UK, companies such as General Electric, American Express, Apple, John Lewis, HSBC and Dell are shifting their focus to earnings generated from repeat customer sales and enthusiastic referrals that generate growth of some 2.6 times their industry's average.

Other key findings in Bain's research included:

  • Eighty percent of executives said their company delivered a superior customer experience, yet only eight percent of customers felt that companies delivered a superior customer experience;
  • Only one in two management teams tailor their products and services to individual customers;
  • Only one-third of management teams acknowledge having processes to listen to their customers effectively.

Reichheld explained: "Satisfaction surveys have lulled firms into believing that most customers are happy, but this is wrong. The decided majority of customers are either angry or bored." Reichheld's new book is to be published in March 2006 by Harvard Business School Press.

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