Are Your Profits ‘Good’ or ‘Bad’?

It’s a new year, and hopefully the marketplace will soon be returning to normal. So let’s take stock for a moment: are the profits your company is earning-;or will soon be earning-;good profits or bad?

The distinction between good and bad profits is something we owe to author Fred Reichheld of Bain & Company. In The Ultimate Question 2.0, Reichheld is primarily concerned with how companies treat their customers, so he defines bad profits as “profits earned at the expense of customer relationships”:

“Whenever a customer feels misled, mistreated, ignored, or coerced, profits from that customer are bad. Bad profits come from unfair or misleading pricing. Bad profits arise when companies shortchange customers…by delivering a lousy experience. Bad profits are about extracting value from customers, not creating value. When sales reps push overpriced or inappropriate products onto trusting customers, the reps are generating bad profits. When complex pricing schemes dupe customers into paying more than necessary to meet their needs, those pricing schemes are contributing to bad profits.”

But let’s expand this definition a bit. Bad profits are also profits earned at the expense of a company’s employees. They are profits earned by underpaying or mistreating the people who work for you, or by exposing them to danger. Bad profits are profits earned at the expense of the community, for instance by polluting the air or by figuring out some barely legal tax dodge. 

Bad profits come from focusing on near-term benefits at the expense of longer-term success. They damage the longer-term value of the company and therefore hurt long-term shareholders.

Reichheld’s definition of good profits is equally useful and expandable:

“If bad profits are earned at the expense of customers, good profits are earned with customers’ enthusiastic cooperation. A company earns good profits when it so delights its customers that they willingly come back for more-;and not only that, they tell their friends and colleagues to do business with the company….The right goal for a company that wants to break the addiction to bad profits is to build relationships of such high quality that those relationships create promoters, generate good profits, and fuel growth.”

From an employee’s point of view, good profits are those that fund good working conditions, living wages, decent benefits, and an opportunity to share in the wealth. Good profits ensure job security and open up new opportunities for learning. From the community’s point of view, good profits are those that allow a company to pay its taxes, maintain and improve its property, and generally act as a good corporate citizen.

Maybe you want to be earning good profits. But creating and sustaining them depends on a few things. One is a high ethical standard. That isn’t hard, if your company is committed to working openly with your community. Transparency is always and everywhere the enemy of wrongdoing.

Next, you’ll need to look to the long-term health of the company-;not just the next quarter’s profits. Companies that don’t earn healthy profits over the long term don’t stay in business.

Treating employees and customers like partners sustains good profits. Employees who are treated like partners learn and understand the economics of the business. They have a chance to share in the wealth, and they thus have a stake in the company’s success. Customers who are treated like partners are invited into the conversation and asked what they value. Growing profits becomes a collaborative effort.