Pinned Post - Flipkart vs Amazon Series

Flipkart and Focus 4 - Beware the Whispering Death

The fourth part of my series on Flipkart and its apparent loss of Focus and its battle with Amazon appeared in DNA on April 20th, 2015 . ...

Jun 1, 2009

HBR Article - Companies and Customers Who Hate Them

Written two years ago, Companies and the Customers Who Hate Them, by Gail McGovern, Youngme Moon, from the June 2007 issue of the Harvard Business Review reads remarkably prescient, especially when talking about the US credit card industry and the fact that it has taken an act of the US Congress to try and put a stop to their rampant practices of gouging customers through arcane fine-print legalese and rampant overcharging and imposition of fines on customers.
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.
Think about it. It's true, isn't it? Your bank is looking to impose a fees if you do not use the ATM card at all, or if you use it at another bank's ATM, if you come into the bank, if you ask for new PIN, if in their opinion your signature on a cheque does not match the one on their records, and for reasons so flimsy and obvious you wonder if they wouldn't be better off just telling you straight up that they wish to steal your money, "Sir, we want your money, but have run out of ways to do that legally, so if you would be so kind to hand over your wallet. Yes, the wallet with all the money in it. Thank you, and that will be all for the day. Till next time."
But many firms have discovered just how profitable penalties can be; as a result, they have an incentive to encourage their customers to incur them – or, at least, not to discourage them from doing so. Many credit card issuers, for example, choose not to deny a transaction that would put the cardholder over his or her credit limit; it’s more profitable to let the customer overspend and then impose penalties.
When some banks tally up customers’ accounts at the end of each day, for example, they debit checks in order of size – biggest check first – rather than chronologically. This increases the chance that the remaining checks will bounce, allowing the bank to charge the customer for multiple overdrafts.
According to one estimate, consumers paid $53 billion in overdraft fees in 2006, a 58% increase from five years earlier
Profits for American banks have increased by close to 67% over the past ten years. Stock prices are up for the largest banks, and so are revenues. So why shouldn’t banks rely on high fees?
Why wouldn't they? They did. Till the financial mess created by banks hit the fan. When over-leveraged banks had to approach the government for trillion dollar bailouts. Which by the way came out, again, from the taxpayers' pockets. Till the stock prices of these banks had fallen by 95% or more. Which hurt the common shareholders. Until they had no leverage left to fight credit card reform.

Or take the case of health clubs.
Health club companies have a long history of luring customers with attractive short-term offers, assaulting them with aggressive sales pitches, and then binding them with long-term contracts. That’s because some of their most profitable customers on a cost-to-serve basis have been those who were enticed to sign up for a long-term membership but then rarely visited the club.
In India chains of health and fitness clubs are starting to gain traction across the country. Bangalore has seen aggressive advertising by Talwalkar's and Gold's Gym to attract membership. Their monthly membership fees is generally twice or thrice the cost of an annual membership's monthly cost. Why? Because the person who takes up membership for only one month is likely to frequent the club more often than someone who has bought annual membership. And he is the ideal fitness club member, as far as the fitness club is concerned. The only way he or she could become an even more ideal customer is by taking up the personal trainer option, that costs several thousand rupees per month. And what does the customer get in return? Any guarantees? Any guarantees that are legally enforceable? Is there any service level guaranteed? If you come into the club at 6pm, does the club promise that you will have to wait no more than 15 minutes before you get access to a treadmill? No. Does it put into the contract that if a machine breaks down it will be repaired within 48 hours or else you will get a 5% credit on your fees? No. That is because there is no competition as far as health clubs are concerned. Fitness clubs are very sensitive to local competition, and not very to distant competition. If you are living in Colaba in South Mumbai, it does not matter to you if there is a much better gym that ofers membership at half the fees of your local gym if that gym is in Mulund. Right? Or if your Malleswaram gym is costlier than the gym in Kanakpura. What does matter is if there are two or more gyms offering comparable services within a kilometer or two of each other. In that case, one of two things happens: if the catchment area that these gyms are serving is populous and rich enough, then all the gyms will have enough membership to not resort to price competition. If the number of potential patrons is not in surplus, they will enter into an unofficial cartel and keep prices artificially high, since price competition by any one gym will soon drive prices down for all gyms.

Keep in mind that one reason why such practices evolve in the first place, take root at one department, then within the whole company, and are quickly imitated by the industry, are not that difficult to fathom. The manager who adopts these practices may not be stopped dead in his tracks by his manager, either knowingly or unknowingly. The manager who gets results, and by results I mean a better than expected return, is rewarded. Even while the company is parroting out sermons to its employees within and to its customers outside that it believes in the highest standards of ethics. Employees within the company will believe, correctly, that the company expects its employees to do as it does, not as it says. Before you know it, pretty much the entire company has walked many a mile down this slipper slope of ethics, and no one really knows who took the first step, or when. It is unwritten company policy. It is the way that things are done. New recruits learn that fast. Those who don't get weeded out quickly. Till there is near uniformity as far as behavior is concerned.

It takes a crisis of mortal proportions to jolt the company out of its ehtical slumber.

© 2009, Abhinav Agarwal. All rights reserved.