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Good and Bad profits – Do your Customers Think you Make Bad Profits?

Any profit is a good profit not so? Wrong. A bad profit makes as your long term viability questionable whereas a good profit boosts sales and decreases costs.

I am sure you have heard about Net Promoter Score created by Fred Reichheld. A brilliant and easily implemented measurement system where you subtract those who hate you (Detractors) from those that love you (Promoters) giving you a Net Promoter Score. (Be aware there are advantages and disadvantages to this methodology). One of the concepts Fred Reichheld came up with is the concept of good and bad profits, which I thought was insightful as initially I thought any profit is better than a loss.

You make a profit and are proud of it, right? Do you know whether your customers see it as a good or bad profit? In other words do they think you are adding value or ripping them off? If they think you are adding value they will stay with you through thick and thin, but if they think you are ripping them off they will drop you as soon as a better supplier comes along.

BAD PROFITS

Bad profits are where you make money without thinking of your customers’ satisfaction – extracting value from customers, not adding value. Customers think they are being misled, mistreated, and ignored or coerced (think Eskom). As a result they contact your company and call centre more often abusing your employees, who over time become burned out and leave for a happier work environment. Your complaints department has to be bigger, which is an additional cost. Staff turnover is higher and are more difficult to replace because nobody wants to work in a negative environment. Your HR costs are higher as employees stay for a shorter time and your staff is full of people who cannot find a job anywhere else (think unproductive, think civil service).

Customers won’t refer you to their colleagues or friends making you have to work for each and every customer. Customers will also defect to a competitor if they can so your customer churn is high and you constantly have to fill your sales pipeline, not a cheap exercise. Unless you have a monopoly or a government department, your company will eventually fail because of your higher costs and lower revenue. Basically bad profits strangle company growth.

GOOD PROFITS

Good profits are dramatically different. You earn good profits when you delight your customers so they see you as adding value. As a result customers will increase their purchases and are more willing to come back time and time again bringing colleagues, friends, and family. Because they love you they spread the good word about your company. They become part of your marketing department giving enthusiastic referrals and ultimately leading to superior growth over your competition. Your sales pipeline is fuller, reducing your cost of sales. Your customer churn is lower and in some industries reducing your churn from 15% to 10%, you can increase your profit by as much as 50%.

Your staff are working with happy customers making their work environment a positive one. When the word gets out you will find it easy finding good productive employees who stay longer significantly reducing your HR costs. Your complaints department is relatively small due to happy customers, a lower overhead cost compared to your competitors. Good profits lead to reduced costs and increased sales resulting in significant growth.

HOW TO IDENTIFY GOOD AND BAD PROFITS

To find out if you have a good or bad profit company the only way is to go out and ask your customers whether you are adding or destroying value. The approach or methodology is irrelevant as long as you don’t cherry pick those customers you know will give you a good score. (Obviously we would prefer if you use Customer Relationship Auditing!)

When conducting a customer satisfaction survey you should understand why you are doing it and what you want to get out of it. If it is simply to find out whether you are on the right track then an online or telephonic survey is fine. If you want to use the results to build better relationships with your customers then more complex surveys will be necessary, surveys where you know what each customer said so you can go back and address issues customers raise. Remember, customers participate in surveys because they want to see an improvement. In that area we excel as we create Individual Reports around each customer highlighting exactly where you are meeting and not meeting customer expectations allowing you to go back and address those issues with each customer increasing customer satisfaction and customer loyalty.

Douglas MacGregor

Customer Relationship Auditing

“Building superior business relationships through client intelligence”

+27 (11) 805-3588 (direct)

+27 (82) 414-9394 (cell)

douglas@cra.co.za

www.cra.co.za

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