Do You Make Bad Profits?

Last night I posted about Fred Reichheld, author of The Ultimate Question. He discussed the difference between "good profits" and "bad profits." "Bad profits" are defined as those policies or procedures that make money for the company, but cause customers to quit using that company. For example he cited:

Hotel phone bills that are marked up many times what the actual cost is. (I´d add charging for Internet access as well.)

Returned check fees (some in excess of $35.00)

Airlines that charge $100 to change a ticket

Rental car companies that charge three times the actual cost of gasoline when you don´t fill up the tank before returning it

Back-end fees such as a credit card company that charges you when you exceed your limit.

I learned in Economics 101 that the motive for setting many of these fees so high is to discourage behavior. For example, most customers are careful not to bounce a check when they know it will cost them $35.00. In this case that policy is posted prominently at nearly all retail outlets that take checks. Also, the fee is nearly universal so this "bad profit" is probably not going to cause financial institutions to lose customers.

But airlines shouldn´t charge $100 to change a ticket especially when there is a seat available on the preferred flight. Unlike bouncing a check, which is primarily the customer´s fault, having to change a flight reservation is not always the fault of the passenger. There are too many other variables in play.

Rental car companies shouldn´t charge exorbitant fees if you don´t return with the gas tank full.("Highway robbery" is the expression that comes to mind.) Enterprise Rent-A-Car doesn´t. That´s one reason why they have the highest customer loyalty in their industry.

When US airlines first allowed check-in over the Internet, some hotels charged fees of up to $20 to print boarding passes. Most have discontinued this after negative customer feedback. That was definitely an example of bad profits.

Fred discussed "good profits" also. These are profits derived by customer loyalty such as referrals and repurchases.

Neither type of profit, good or bad, is measured by GAAP. Oh sure, you may be able to tally up how much you made off of inflated charges, but what is not being measured is how many customer you lose when you do that and how much money they didn´t spend with you.

Do you make bad profits? How many customers do you lose because of them?

Regards,

Glenn