Are you Addicted to bad Profits?
Are You Addicted to Bad Profits?
Are your sales producing good profits or bad profits? If you’re like most sales managers, you’ll probably answer that question with a question: Is there such a thing as bad profits? On the face of it, the phrase “bad profits” may seem a contradiction, like “bad banana split.” But to customer loyalty guru Fred Reichheld, Director Emeritus at Bain & Co., and author of The Ultimate Question (Harvard Business School Press, 2006), not only is there such a thing as bad profits, but too many companies today are relying on them at the expense of their long-term growth and reputation. Managers must learn the difference between good and bad profits, he says, and make a commitment to pursuing only good profits.
So what’s the difference? Bad profits are profits earned at the expense of customer relationships; good profits are earned with the customer’s enthusiastic cooperation. Bad profits come from unfair or misleading pricing. Bad profits result when sales reps push overpriced or inappropriate products or solutions onto trusting customers. Bad profits occur when companies buy growth by encouraging the hard sell to meet quarter-end or year-end goals; they occur when companies discount heavily or offer temporary rebates in order to boost customer volume.
AOL is a great example of how bad profit works: In the wake of its successful IPO in 1992, the company could have invested its new cash in service and quality improvements; instead it opted to buy growth by “carpet-bombing the country with free software diskettes,” says Reichheld. The flood of new users choked the service’s capacity, however, and by 2002, a whopping 42 percent of the company’s customers were dissatisfied with the frustratingly slow service and the bombardment of pop-up ads. That’s bad profit.
Good profits, on the other hand, are earned by delivering such a great customer experience that customers willingly and enthusiastically come back again and again, and tell their friends and colleagues about it. Good profits result when a sales rep shows a prospect why a lower-priced solution will better fit his needs than the higher-priced solution he’d been thinking of. Sure, that particular sale will be lower, but that customer is going to be thrilled – he’ll return to the rep’s company and will tell his colleagues about it. Those are good profits. Those are the kind of profits that will drive long-term growth and build a company’s solid reputation.
Here’s an example of good profits: not long ago, Vanguard Group realized it had inadvertently been overcharging its best customers and that these customers were, in essence, subsidizing the company’s new customers. For many organizations, this might seem a smart way to grow; to Vanguard, it seemed unethical. As soon as they realized what was happening, Vanguard executives reduced prices by as much as one-third for these best customers. The result: “When the company righted the wrong, its core customers were so delighted that they increased their holdings and boosted referrals,” says Reichheld. “That helped turbocharge Vanguard’s growth and pushed the company toward leadership in the mutual funds industry.”
So how can you tell whether your organization is producing good or bad profits? It comes down to Reichheld’s “ultimate question:” How likely is it that you would recommend this company to a friend or colleague? Customers can be categorized according to their answer to this question: promoters score high on a scale of 1-10; detractors score on the low end. To determine how well you’re doing with good versus bad profits, simply ask your customers that question, then take the percentage of promoters and subtract from it the percentage of detractors. The result is what Bain &Co. (www.bain.com) calls the Net Promoter Score, or NPS. Companies with the most efficient growth engines – or the most good profit, such as USAA, Amazon.com, Vanguard, eBay, and Dell – operate at NPS efficiency ratings of about 50 to 80 percent, says Reichheld. “But the average firm sputters along at an NPS efficiency of only 5 to 10 percent. In other words, promoters barely outnumber detractors.”
The bottom line: to boost long-term revenues and profits, focus short-term on your NPS. What is it? How can you improve it? How can you transform your sales approach into one that pursues only good profits? By answering these questions and following that guidance, you’ll build better customer relationships, better profits, and supercharge your long-term growth.
"I'm a great believer in luck. I find the harder I work, the more I have of it." - Stephen Leacock
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