The Idea in Brief
A company’s most profitable customers may be those who make the worst purchasing decisions. Consider retail banking. Depending on the minimum balance consumers agree to keep in their accounts, banks set particular interest rates and fees. If a customer’s balance falls below the minimum, he pays penalties. If it climbs well above the minimum, he’s stuck with a low interest rate. Either way, the bank wins; the customer loses.
Firms taking advantage of customers through such tactics, whether deliberate or unintentional, trigger a backlash: consumers retaliate—with lawsuits, mass defections, and company-specific “hate sites.”
How to avoid enraging customers? Identify and eradicate practices that extract value from them, advise McGovern and Moon. Then adopt practices that provide value to customers. For example, online bank ING Direct offers accounts with no minimums or tiered interest rates—and has become the nation’s fourth-largest thrift bank.
The Idea in Practice
McGovern and Moon offer these guidelines for replacing company-centric with customer-centric policies:
Recognize Company-Centric Strategies
Adversarial value-extracting strategies are common across industries. Recognizing these strategies can help you avoid them in your own firm. Example:
Cell phone service carriers offer several dozen pricing options. They then take advantage of customers’ difficulty in predicting their usage by penalizing them for using too much time or not enough time. Fifty percent of U.S. carriers’ income derives from such fees. Example:
Health clubs’ most profitable customers are those who have been enticed to sign up for a long-term membership but who then rarely visit the club. Knowing this, many clubs intentionally sell far more memberships than they have the floor space to accommodate. And through confusing contractual language, they make it difficult for customers to extricate themselves from the deal.
Look for Warning Signs
To spot signs of harmful practices in your company, ask:
- Are our most profitable customers those who have the most reason to be dissatisfied with us? If yes, it’s a matter of time before your customers will retaliate.
- Do we have rules we want customers to break because doing so generates profits? Rules that, if violated by a customer, preserve or enhance value for your firm are actually mechanisms for taking advantage of customers.
- Do we make it hard for customers to understand or abide by our rules? Certain cell phone carriers, for example, make it cumbersome for customers to monitor their minute use.
- Do we depend on contracts to prevent customers from defecting? When companies use long-term contracts merely to prevent poorly served but profitable customers from defecting, they’re demonstrating a lack of confidence in their value proposition.
Put Customers First
Sometimes all it takes to trigger a mass defection from a company-centric firm is the appearance of a customer-friendly competitor—one that puts customer satisfaction and transparency first. Example:
Virgin Mobile USA offers a pay-as-you-go pricing plan with no hidden fees, no time-of-day restrictions, no contracts, and straightforward, reasonable rates. It has nearly five million subscribers and a customer churn rate well below the industry average. Customer satisfaction hovers in the 90th percentile. And more than two-thirds of customers reported recommending Virgin to friends and family.
One of the most influential propositions in marketing is that customer satisfaction begets loyalty, and loyalty begets profits. Why, then, do so many companies infuriate their customers by binding them with contracts, bleeding them with fees, confounding them with fine print, and otherwise penalizing them for their business? Because, unfortunately, it pays. Companies have found that confused and ill-informed customers, who often end up making poor purchasing decisions, can be highly profitable indeed.
