In his book The Ultimate Question: Driving Good Profits and True Growth, Fred Reichheld introduced the concept of Bad Profits as such:

Too many companies are addicted to bad profits—profits that come at customers’ expense and drain the value out of customer relationships. Whenever a customer feels misled, mistreated, ignored, or coerced, then profits from that customer are bad. Bad profits come from unfair or misleading pricing. Bad profits arise when companies save money by delivering a lousy customer experience. Bad profits are about extracting value from customers, not creating value.

Bad profits often boost short-term earnings; in the long run, they burn out employees and alienate customers. They also undermine growth by creating legions of detractors—customers who sully the firm’s reputation and switch to competitors at the earliest opportunity. Bad profits choke off a company’s best opportunities for true growth, the kind of growth that is both profitable and sustainable.

When people first hear about Bad Profits, they normally nod their heads in agreement. After all, the excerpt above reads like motherhood and apple pie – of course you don’t want to boost short-term earnings at the expense of long term customer value.

But if everyone so readily agrees that Bad Profits are undesirable, why do they exist? I don’t believe that anyone starts out trying to create Bad Profits. They are often born out of good intentions coupled with misaligned priorities and a lack of accountability to the customer.

I was recently chatting with the owner of a local company that repairs office hardware such as copiers, computers and whatnot. We got to talking about customer loyalty, and he mentioned that his company was currently experiencing an exodus of customers. When I probed further, he told me the tale of how a bad profit was threatening the future of his company.

Up until about a year ago, he had three managers in his company – a Sales Manager, a Customer Service Manager who oversaw the Field Technicians, and an Office Manager. Customer loyalty was high and revenues were respectable. Then the Customer Service Manager left the company.

The Sales Manager was well respected, and since he also had employees in the field, the Field Technicians were moved underneath him. On the surface this was a sensible, well intentioned decision.

But the Sales Manager’s priorities, goals and compensation were still highly stacked towards generating additional revenue. With the absence of the Customer Service Manager to hold him accountable, it did not take long for him to begin viewing the Field Technicians as another arm of his sales force.

And so began the installation of a Bad Profit. Field Technicians were quickly required to sell additional products and services when they went on service calls. The thinking was that since they were already in front of the customers, they might as well try to sell something.

At first this appeared to be a brilliant plan. Additional sales started pouring in from the Field Technicians, and the Sales Manager looked pretty clever for a couple quarters. That is, until clients’ service contracts started expiring. Suddenly contracts that they had held for years were not being renewed. Customers began migrating to other providers because their trust, satisfaction and loyalty had been depleted in the name of bad profits. Unfortunately, the company is now so dependent on this revenue that weaning the business off of the Bad Profits will be a long and painful process that may or may not be successful.

The worst part about Bad Profits is that once your company allows them in, they are very difficult to eliminate. To prevent Bad Profits you must constantly stay on guard against misaligned priorities, question ideas that seem too good to be true, and ensure that someone in your organization has the responsibility (and the authority) to act in the best interests of your customers at all times.