Just because brands can doesn’t mean they should

Landing customers with unexpected price hikes and made-up fees might increase revenues in the short term but the long-term damage could be devastating.

It costs more to acquire customers than to keep them. So driving loyalty makes sense as it drives profit. You don’t have to spend time and resources going out and finding new clients — you just have to keep the ones you have happy. And there is tonnes of data to back this up: research done by Frederick Reichheld of Bain & Company (creator of net promoter score) shows increasing customer retention rates by 5% increases profits by 25%.

So, why then do so many brands have a deliberate, conscious strategy of aggravating and infuriating their loyal customers? Tying them down with two-year contracts, raising prices with no change of proposition, creating arbitrary fees, forcing sign-ups to 20 pages of jargon-laden fine print, and otherwise screwing them for the pleasure of their business?

I was reminded of this just the other day when I got an annual letter from one of the best-known brands in Britain, my broadband and TV provider, telling me it was raising prices by £3.29 per month. Not a hint of ‘here’s why we are doing this’. It is doing it just because it can. Really, the letter should have read ‘we are increasing our prices because the CFO demanded a price rise or you are too lazy to change provider and we know it’.

Sadly for said TV and broadband provider I called their bluff and got on the phone, saying I would leave. But I was promptly asked to stay with promises of lower prices that I quickly took advantage of. Rewarding loyal customers with price increases will result in annoyed customers and lower revenues. Not very smart.

So why do brands do this? Because it pays. And because they can.

Creating value for the customer is a basic business strategy but sadly many brands find that confused, ill-informed customers can be a source of value extraction, not creation. Yes, I am looking at you banks, telcos and insurance companies. Nobody wants to feel they are being taken for a fool, but many brands have no shame and consciously exploit customers.

I am a hypocrite though. I was one of those marketers who had to implement annual price rises for no reason, just because we could. I can distinctly remember one brand I worked for implementing a ‘short-term’ surcharge to counter a rapid increase in costs. When the cost went back down, the short-term surcharge suddenly became long term. The brand became addicted to the extra revenue.

What is really going on?

Personal experience in marketing departments of such brands tells me that there’s no defining moment when these companies crossed the line and they rarely made a deliberate decision to take advantage of their customers. Rather, they found themselves on a slippery slope when they discovered the revenue and profit potential of made-up fees, mysterious surcharges, confusing service choices, hard-to-read fine print – and could not stop sliding down it.

Most egregious are the brands trying to position themselves as ‘purpose-driven’ while introducing made-up fees that take advantage of customers’ forgetfulness or misfortune. I recently had my wallet stolen and was charged a fee to replace my debit cards, but mysteriously, not my credit cards. And as for airlines making families pay extra in order to sit next to each other, well, I am not sure where to start with that. Rather than customer segmentation based on ability to pay, I think a mechanism for extracting value and destroying trust would be more apt.

And such practices are expensive in terms of customer acquisition. There is a reason why many telecom brands have such big marketing budgets – customer churn means you have to keep filling the funnel with new customers.

Defining the worst practices

Gail McGovern and Youngme Moon, two Harvard Business School academics, looked at this question and aptly called their paper on the topic ‘Companies and the customers who hate them’. They suggest there are four questions that define the worst practices:

1. Are our most profitable customers those who have the most reason to be dissatisfied with us?

2. Do we have rules we want customers to break because doing so generates profits?

3. Do we make it difficult for customers to understand or abide by our rules, and do we actually help customers break them?

4. Do we depend on contracts to prevent customers from defecting?

McGovern and Moon say a large number of companies, if truthful, would respond “yes” to some or all of these questions.

A call-to-action

Now, this is not meant to be a hypocritical attack on certain brands but a call-to-action to save these brands from themselves. Gaming the system, abusing an oligopolistic situation and squeezing value from customers, leaves brands vulnerable and creates opportunities for competitors. Essentially, you are putting out the welcome mat for newcomers to approach things differently.

Take app-only bank Monzo, for example. Its CEO Tom Bloomfield claims: “The banks are so obsessed with their financial products and optimising them that they forget the human. We start with trying to solve what the customer is worried about”. Having a transparent, value-creating proposition that targets customers’ dissatisfaction with bank incumbents means it has a £1bn valuation on very low revenues.

Marketers, CEOs and CFOs: enraging customers is not a long-term strategy. Sometimes all it takes is the appearance of a customer-friendly competitor to drive mass customer defection. We must learn to distinguish between what we can do and what we should do, between what creates value for customers and what causes them to hate us. Making this distinction might produce lots more who love us.

Colin Lewis is CMO at OpenJaw Technologies

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Tadas R. 5 Dec 2018

    I want to point out that Reichheld and Sasser’s experiment was only a thought experiment based on nothing but pure imagination, a fantasy of cutting defection rate at zero cost, and no knowledge what is the difference between percentage and percentage points.

    • Bruce Clark 5 Dec 2018

      Supporting from the academic world, Tadas is right here. This was a thought experiment that did not account for the cost of reducing defection. Generally the evidence around retention and net promoter is mixed at best.

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