good profit // bad profit

“Do you want me to mount the spare for you?” the voice over the phone asked. He had just told me that my tire was unrepairable and the others were nearly worn out. He seemed hurt I didn’t take him up on the implied offer to buy a new set of tires. The flat tire actually just had a slow leak so it didn’t matter if we swapped out the spare or not so I said, “Sure, why not.”

I recently wrote about a used tire shop with a unique business model. Four days after buying a set of tires, I picked up a slow leak in one. Rather than driving all the way across town to the used tire place, I took it to a national chain tire store less than a block from my office. The contrast between the two businesses really highlights what some have termed “good profits” and “bad profits.”

Bad profits are profits made at the expense of the customer in a way that hurts good will, the overall customer experience, and prevents generating long-term profits from the customer. From my experience, the mobile phone industry follows a bad profits model. All the effort is made to acquire new customers with little effort being made to retain customers. Any business that focuses on fees or charging the customer more with little in return is a business focused on bad profits.

Good profits, in contrast, are profits made in a way that add value for the customer, creates good will, improves the customer experience, and increases the likelihood of long-term profits from the customer. Rather than seeking ways to charge the customer more fees, etc., a business focused on good profits is trying to find ways to serve the customer that makes them want to spend more. Apple and Zappos are regularly used as examples of businesses seeking good profits.

This national chain tire store told me my tire was unrepairable and the rest were getting thin and needed replacing. Then charged me $20 for installing the spare in place of the leaky tire – after they offered to; I did not ask. Lies, fees, and scare tactics to upsell the customer from a cheap repair to $800 worth of tires. They relented on the fee after I protested, but not ripping off the customer when they call you on it is not the same as treating the customer well.

I immediately drove over to the used tire shop where: they told me “no problem” on repairing the tire, hustled my tire through even though they were crazy busy, offered to install it on my truck for me, oh, and didn’t charge me anything for the repair because I bought the tires from them. No written agreements, no need to hassle them, no arguments, just a focus on doing right by their customers.

It’s cheaper and easier to retain customers than to find new ones. Why is this so hard to understand? Which business will I return to in the future? Which business do I refer to others? Which business do I want to support and see thrive? Which am I happy to give money to?

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8 comments

  1. Broc,

    “Good profits” versus “bad profits”, I love this distinction. Very true.

    And I think businesses who pursue the “good profits” strategy are more likely to get new customers through word of mouth marketing from existing customers. When they take care of existing customers, they are indirectly finding new ones at the same time.

    By the way, I’m not sure if you have a Kindle or not. But if you do and you haven’t purchased “The Supermanager” yet, I wanted to let you know that the Kindle version of the book will be available for free on Amazon this Friday and Saturday.

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    1. Greg, you’re on to something – they are indirectly finding new ones at the same time. The challenge many businessesfolks face is that it is so hard to quantify “indirect” so they focus on the very short-sighted things they can measure. I believe in watching expenses and charging fair prices, but there’s a very fine line between “fair price” and shooting yourself in the foot.

      Congrats on the Kindle release!

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  2. Great post Broc! Like you, I fail to understand why businesses continue to ignore existing customers and focus solely on new customers. There needs to be a healthy balance.

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    1. Chris! Glad you liked it. It does seem like a painfully simple equation: lifetime value of customer = net profit from purchases – cost of acquiring customer – cost of retaining customer. I just made that equation up, but it seems about right. The more frustrated customers are the less they spend and the harder you have to work to find new customers. If you can’t keep customers past the first purchase, they better be substantial.

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  3. The first transaction only really counts if it’s done in such a way as to encourage the second, third, fourth, etc. And with Greg referencing word of mouth marketing, it is soooo much less expensive than the traditional advertising most national chains use. A focus on good will = increased profit margins.

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  4. I forget the stats on how much cheaper it is to keep the customer you’ve got than it is to go out and win a new one, but as you suggest, many businesses forget not only the stats, but the entire concept!

    The danger of all the piraña-feeding to attract new business so often collapses the price-points in the market, driving the better businesses out of business. As consumers we can use the web to really help promote the good guys.

    Whenever you get good service, shout it out!

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    1. Great thoughts, Peter. It’s easy to gripe about bad service – somedays I wish the world would stop providing me with so many fantastic examples 🙂 – but it’s crucial to champion and celebrate the businesses that really do it right.

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