Entrepreneur Ideas: The Case Against Bad Profits

by | Small Business Consulting

Being able to think in terms of “good profits” and “bad profits” might seem like a luxury you just don’t have when your company is struggling to grow.

After all, profitability is the goal, so any business profit must be good, right?

Not necessarily.

There are at least two kinds of bad profits. The first is customer-focused; the second concerns your company. Both kinds of bad profits are symptoms of short-sightedness by you, the business owner or operator.

To give your company the best chance for your company to succeed, you need to do your best to avoid them.

Bad Profit #1: Your Customer gets a Bad Deal

This kind of bad profit includes profits earned by abusing the customer relationship. A business profit is turned in a way that does not create any value or positive results for the client. Sometimes it’s a “fine print” thing, other times they just do it because they know they can get away with it. In any case, the customer experience is poor.

Generally speaking, if a customer sincerely feels exploited, mistreated, lied to, or misled, it’s a bad profit. Bad profits typically come from reductions in customer service, by putting in place too many restrictions on buyers, and by imposing unjustifiable charges.

Examples include:

·         Being charged high fees by a bank for a check that did not clear your account

·         Extra fees for Internet service in an expensive hotel room

·         Annual fees for credit and debit cards

·         Insurance on rental cars, when your own insurance would cover damage

·         Needless fees for changing airline flights, especially when there are open seats on both planes

So what’s the big deal?

Well, besides just being the wrong thing to do, you also risk that these alienated customers will talk badly of your company, hurt your reputation, and –of course – take their business elsewhere. You might get away with this kind of behavior for a while, but not for long. Remember, you live in the social media age.

So take a hard look at your operations. Are there constant complaints about a particular product or feature, and what you charge for it? Would you buy from you?

And don’t rationalize! It’s easy to tell yourself, “we need to charge this because …”

Your customer doesn’t care. He just feels what he feels, and it’s likely negative.

For more on this kind of bad profit, see MP Star Financial’s post on The Ultimate Question that can Double Your Company’s Growth Rate.

Bad Profit #2: Your Company is Lazy

This is more difficult to pin down. And maybe “lazy” isn’t the best term, but these are profits you accrue at the possible expense of other, more attractive, options. Economists talk about the “opportunity costs” of choosing one action over another. In a sense, lazy profits are about opportunity costs – potentially high opportunity costs.

In one typical case, lazy profits are those that are easy and predictable, but come with low margins. What’s “low” depends on the industry you’re in, but you probably know it when you see it.

Should you turn down all your low-margin business? Absolutely not! Especially when you’re dealing in high volumes. Besides, you have to keep the lights on.

But realize that resources you devote to serving low-margin customers are not available to pursue and serve more lucrative situations and higher business profit margins. There are only so many hours in a work week. Where do you want to apply your efforts?

In another case, a lazy profit can come from repeating the same processes or services. Ask yourself, could you do this particular job, order, or contract in your sleep? If your current product or service mix isn’t allowing your employees to learn, expanding your market share, or enhancing your company’s reputation, you’re stagnating.

To grow and expand, resources must be devoted to higher-margin prospects that give you the chance to acquire “good profits.”

There’s nothing wrong with repetition for a while, but if you’re going to grow, you need to extend yourself. Auto companies figured this out almost a century ago, when they started introducing new models every year.

In both cases, you should take care to realistically evaluate your chances of winning the new business. What resources can you apply and what are you willing to give up? For instance, one particularly successful management consulting firm lets go of its bottom 15% of business each year – as measured by revenue – to freeup the resources needed to pursue better opportunities.

For More Great Ideas for Entrepreneurs from MP Star Financial:

Entrepreneur Ideas: Seven Cash Flow Management Tips

Entrepreneur Ideas: Four Tips for Cracking a New Market

Entrepreneur Ideas: Your Guide to a Painless 2013 Business Marketing Plan

Entrepreneur Ideas: Making Trade Show Marketing Work

Entrepreneur Ideas: Four Year-End Questions for Your Accountant

Entrepreneur Ideas: Four Things a Business Owner Must Do Before Year-End

Entrepreneur Ideas: Trademarks, Copyrights and Patents can Protect Your Work

Entrepreneur Ideas: Using Your Calendar to Sell

Are cash flow management problems impacting your company’s ability to grow? Stop waiting 45 or 60 days for payments! MP Star Financial can help you get a better handle on your company’s cash flow management. Call for more information. (800) 833-3765, extension 150.


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