Is there such a thing as ‘bad profits’?

The point of a business is to make money. But revenue generated under negative circumstances brings with it some troubling baggage—and it’ll likely bite you in the long run.

“When companies benefit financially from a bad customer experience, those are bad profits,” explains Jeff Sauro, author of Customer Analytics For Dummies.

Examples: Customers have to pay the check at a restaurant after receiving terrible service, but they won’t return. People pay a cable bill for 200 channels but watch fewer than 20.  

“Bad profits are like bad karma for companies,” he adds. “Sure, you get the sale now, but the bad experience, price or product will come back to hurt you.”

5 steps to ‘good profits’

Do you have bad profits? According to Sauro, here’s how to respond:

1. First, figure out what percentage of your profits are “bad.” Your company’s Net Promoter Score (NPS) is a useful tool to gauge which percentage of your profits are bad. NPS is based on the question “How likely are you to recommend to a friend or colleague?” and is presented as a percentage. (See below to calculate your score.)

“By combining your NPS data with customer-by-customer revenue data, you can estimate the amount of revenue derived from bad profits,” Sauro explains.

“Once you’ve done the math, how much revenue is too much from detractors—in other words, dissatisfied customers who are likely to talk negatively about your product?” he asks. “A common threshold is to obtain no more than 10% of revenue from detractors. In other words, if more than 10% of your profits are bad, you should work to eradicate them with a sense of urgency.”

2. Next, uncover why these profits are bad. You probably already have some idea why customers may be dissatisfied. But it’s always wise to go directly to the source before making changes.

Survey your customers. In addition to asking whether they would recommend your company, ask why and what should be improved. Focus your attention especially on the feedback from your detractors. They give the best insight into factors driving your bad profits.

3. Identify the low-hanging fruit. After surveying your customers, you’ll likely identify several factors driving bad profits. Go for the obvious ones first. (See the most common sources of bad profits below.)

4. Figure out how to solve the issues that are leading to bad profits. What separates the best-in-class companies from the rest is their ability to make changes based on data.

“This might involve revising existing policies and procedures or creating new ones,” says Sauro. “It might mean adjusting your pricing or making changes to your products. It might also involve empowering employees to take immediate action when they encounter a situation that might lead to bad profits.”

Example: Financial services firm Charles Schwab gives employees the ability to credit customers with free trades, and in some cases, even help offset losses.

Says Sauro, “Schwab understands that it doesn’t make sense to haggle over $100 (which would end up being bad profits) with a customer who has spent $10,000 over 10 years with the firm, and who will continue to spend more over his or her lifetime if a positive relationship is maintained.”

5. Stop selling to perpetually dissatisfied customers. What happens after you’ve addressed as many causes of bad profits as you reasonably can? How do you handle those detractors you just can’t seem to satisfy?

While it may seem crazy, in some cases, getting rid of mismatched customers may better your reputation and increase your profits in the long run.

“Realize that some people are simply determined to be unhappy, and that you may not be equipped to give others the product or service they need,” Sauro points out. “In these instances, apologize for not meeting customers’ expectations and refer them elsewhere. Meanwhile, take a fresh look at your marketing and branding, and make sure that they are geared toward attracting customer segments that are a good fit.”

The bottom line: Bad profits are a ticking time bomb for your business. They can dramatically increase customer resentment and reduce your overall profits.

“In today’s competitive market, you simply can’t afford those things,” says Sauro. “So be proactive about turning bad profits into good ones.”

How to calculate your ‘Net Promoter Score’

The so-called Net Promoter Score (NPS) is based on the idea that every company’s customers can be divided into three categories: promoters, passives and detractors.

Just survey your customers with one simple question: “How likely is it that you would recommend our company to a friend or colleague?” That way, you can track these three groups and get a clear measure of your company’s performance through its customers’ eyes.

Customers respond to this question on a 0-to-10 point rating scale and are categorized as follows:

• Promoters (score 9-10) are loyal enthusiasts who will keep buying and refer others, fueling growth.
• Passives (score 7-8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings.
• Detractors (score 0-6) are unhappy customers who can damage your brand and impede growth through negative word-of-mouth.

To calculate your Net Promoter Score, take the percentage of customers who are Promoters and subtract the percentage who are Detractors.

4 sources of bad profits

1. Quality. Are your products and services of excellent quality?

2. Value. Customers don’t like to feel ripped off. The price relative to what customers receive can generate a lot of detractors or promoters.

3. Utility. Do your products offer all the essential features your customers need and value?

4. Ease of use. A product or service can have all the bells and whistles, but if it’s hard to use (or is a frustrating experience), the features might as well not work.