Good and bad profits

Profit is the reward a business owner receives when revenue exceeds expenses. Yet, all profit is not equal, and one could classify profits as either good or bad. To illustrate the difference, we’ll share two incidents we had while at Hawaii and Texas.

Our recent trip to Oahu was wonderful, and everything would have been picture perfect except for our encounter at an airport car rental business. While waiting for a friend to get a car at Budget, we were told by an employee that the company occasionally has manager’s specials and we could get a convertible for $39.

A few days passed and when I called the “special” was now $50. Later, we rented a Hummer for the “manager’s special” of $99 a day, and I asked the employee about the manager’s special on a convertible, and she wrote $65 and her name on the rental papers, and confided that she would cut us a deal if we came back to her.

When the Hummer was returned the next day, I asked about renting the convertible, and another employee said the rate was now $79. When the manager’s special price was asked for he retorted that it was already reduced from the regular rate of $99! Wow, we were given five different prices for the same type of vehicle! With so many prices being given, we wondered if these people were making up a price each day.

When we were handed the bill for the Hummer, it was jacked up to $189.36! There was no explanation why the rate was so high, and when I asked he just pointed to all the charges and his explanation was that it was computer generated. Still not satisfied, I asked to make a complaint and he just gave me the business card of his manager and started serving the next customer. As I left, vocally expressing my dissatisfaction, he offered a cheery “have a nice day” as if I was just another satisfied customer.

Contrast this situation with an exceptional car rental experience we had at Enterprise in Dallas, Texas. Derrick was very professional throughout the entire process. When we received the bill, he discussed each charge and then asked if it was okay. We noticed that he genuinely wanted to know if each customer was satisfied. When one lady returned the vehicle, she commented that she could smell cigarette smoke in the car, and Derrick asked her what he could do to resolve the situation.

Both Budget and Enterprise made a profit from our transactions with them. In fact, Budget made a huge profit at our expense. However, profit that comes from unfair or misleading pricing could be called “bad” profit. The reason is because bad profits come from extracting value from customers, whereas good profits create value for customers.

The problem with current accounting methods is that bad profits will not show up on the books. A company executive or small business owner may think that their company is profitable, but if the profits are earned at the expense of customer relationships it should be labeled bad profit. These profits tarnish the reputation of a company and undermine long-term customer loyalty.

Good profits are earned with the customer’s cooperation and will lead to repeat business and enthusiastic word-of-mouth promotion. Very satisfied customers basically become part of the organization’s marketing effort. After renting a vehicle from Enterprise, we look forward to renting a car from them again. We can’t say the same thing about Budget.

Others must also be having a good experience with Enterprise Rent-A-Car because in 10 years it went from being a nearly $2 billion business in 1994 to a $7 billion-plus business in 2004. Enterprise typically charges less than their competition, yet it pays employees more, and has grown so fast that it is now the largest single buyer of cars and light trucks in the United States. That’s a good example of what good profits can do for a business.

Bain & Company investigated the connection between loyalty and growth and found that companies with the highest customer loyalty typically grew twice as much as their competitors. While many car rental agencies are struggling in a highly competitive industry, Enterprise has been growing at an average of 20 percent per year.

The question for you is: “Does your organization earn good profits or bad profits?” Is your company growing, even in a down economy, or is it sinking along with the rest of the businesses? Does it have many loyal customers who return often and happily refer their friends to your business, or do you see a high turnover of customers and have to constantly advertise to entice new customers to visit? Good profits come to good businesses that treat their customers good. Bad profits eventually turn into no profits and will cause the eventual demise of a business.

(Rik is a business instructor at NMC and Janel is the owner of Positively Outrageous Results. They can be contacted at: biz_results@yahoo.com)