Tuesday, June 05, 2007

Companies who profit from customers' mistakes--watch out

Do you hate your cellphone provider? How about your credit card company? If not, you probably haven't tried to exit your contract or been late with a payment. More and more companies are increasing their profits by penalizing their customers, turning what was intended as a negative reinforcement for bad behavior into a growth engine.

And that's setting those businesses up for a fall, say Gail McGovern and Youngme Moon of the Harvard Business School, in June's Harvard Business Review--"Companies and the Customers Who Hate Them" (link - $$).

Penalties that morph into profit centers create perverse incentives for companies, influencing them to create complex packages and rules that customers can't help breaking (sound familiar?), and to extract large penalties for small offenses ($25 fees for bouncing $5 checks, for example).

When customers find a more reasonable alternative, the penalty businesses become vulnerable. Say McGovern and Moon:

It's no surprise that when a nice guy comes along, customers defect. Consider the online bank ING Direct. In the six years since its launch, ING Direct has taken a determinedly customer-friendly stance, offering products that are straight-forward and easy to understand. From the start, the firm deliberately rejected banking orthodoxy by offering savings accounts with no fees, no tiered interest rates, and no minimums. Today, it offers equally simple ckecking accounts and gives customers surcharge-free access to a network of ATMs.... The approach has paid off. ING Direct is now the fourth-largest thrift bank in the United States....

There are many other examples cited: Netflix's rise as a result of Blockbuster's draconian late-return policy, Life Time Fitness, Virgin Mobile. These companies sell straightforward products with transparent terms that are easy to adhere to. And more of these upstarts will come--unless banks, mobile providers, and others for whom customer penalties are driving their profits change their game.

(Photo: "The Stocks" by stevekrh19 via stock.xchng)