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Blowing the whistle on bad profits

Can you imagine an army of satisfied customers promoting your products and services? As Fred Reichheld explains, it is a must – to ...

By Fred Reichheld . 01 March 2006

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Too many companies these days can’t tell the difference between good profits and bad, and so are growing addicted to bad profits. The consequences are disastrous. Bad profits choke off a company’s best opportunities for true growth, the kind of growth that is both profitable and sustainable. They blacken its reputation and make it vulnerable to competitors. The pursuit of bad profits alienates customers, demoralises employees, and tarnishes the position of business in society.


By “bad profits” I mean profits earned at the expense of customer relationships. Whenever a customer feels misled, mistreated, ignored, or coerced, then profits from that customer are bad. Bad profits come from unfair or misleading pricing. Bad profits arise when companies save money by delivering a poor customer experience. Bad profits are about extracting value from customers, not creating value. When sales reps push overpriced or inappropriate products onto trusting customers, the reps are generating bad profits. When complex pricing schemes dupe customers into paying more than necessary to meet their needs, those pricing schemes are contributing to bad profits.


Bad profits work much of their damage through the detractors they produce. Detractors are customers who feel badly treated by a company – so badly that they cut back on their purchases, switch to the competition if they can, and warn others to stay away from the company they feel has done them wrong. Detractors (who comprise more than 30 per cent of customers at the average firm) drive up service costs and demoralise frontline employees with their complaints and demands. They gripe to friends, relatives, colleagues, acquaintances – anyone who will listen, sometimes including journalists, regulators, and legislators. In the past, the accepted maxim was that every unhappy customer told ten friends. Now an unhappy customer can tell ten thousand “friends” through the internet.


Good profits are dramatically different. If bad profits are earned at the expense of customers, good profits are earned with customers’ enthusiastic cooperation. A company earns good profits when it so delights its customers that they willingly come back for more – and not only that, they tell their friends and colleagues to do business with the company. Satisfied customers become, in effect, part of the company’s marketing department, not only increasing their own purchases but also providing enthusiastic referrals. They become promoters. The right goal for a company that wants to break an addiction to bad profits is to build relationships of such high quality that those relationships create promoters, generate good profits, and fuel growth.


There’s a simple and increasingly well-accepted technique for distinguishing good profits from bad: determine the relative number of promoters and detractors among your customers by asking them one simple question – “How likely is it that you would recommend this company to a friend or a colleague?” The resulting tally, known as Net Promoter Score (NPS), has been shown to correlate well not only with customers’ actual behaviours, such as referrals and repurchases, but also with companies’ growth rates.


But a metric such as NPS is useful only if companies know how to improve their score – and in particular, how to increase the number of promoters. Promoters rev up a company’s growth engine with good profits. They buy more. They generate more than 80 per cent of referrals. If you have enough promoters, and if you continue to delight them, you don’t need to rely on big advertising budgets or an aggressive acquisition plan to grow. The promoters will make you grow. One set of techniques that has proved astonishingly useful in creating promoters is to build a community of customers – customers who tell you day in and day out what they like and don’t like and what they would like to see your company do. The chance to participate in such a community can turn these customers into fans and can inspire them to sing your praises to their friends and colleagues. How to build such a community? There are a variety of mutually complementary approaches.


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