John DiJulius | Customer Experience Blog

It is bad service when your customers need to read the fine print

An article that appeared in the Harvard Business Review (6/07), talked about how companies need to create less company-centric and more customer-centric policies. If customer satisfaction creates loyalty and loyalty produces profit, then why do so many companies infuriate their customers with contracts, hidden fees, fine print, and unnecessary penalties? The article’s authors, Gail McGovern and Youngme Moon suggest it is because companies have found that confused and ill-informed customers can be the most profitable.
Perfect examples of these companies are cell-phone carriers, banks, and credit card companies that profit from customers who fail to understand or follow the rules about minutes used, minimum balances, overdrafts, or payment deadlines. It has been estimated that 50 percent of U.S. cell-phone carriers’ income is derived from penalizing fees. These strategies may be profitable in the short term, but in today’s technology age, public sentiment spreads like wildfire, damaging a company’s reputation in blogs and company-specific hate sites.
What many of these companies have in common is that, even though they appear to take their customers for granted, their customers have little choice but to deal with it. Want to change your cell-phone company? Be ready to pay a hefty penalty to break your contract. Want to dump your internet provider? That may be difficult when one provider monopolizes your area.
Standard customer turnover in the cell-phone industry is 25 percent a year, which is shocking, especially considering most have customers sign contracts. This heavy turnover increases the amount of money that needs to be spent to replace these customers through aggressive marketing and advertising. In 2005, the U.S. cell-phone service industry spent more than $6 billion on ads.17 Which begs the question, how much better would their customer retention and satisfaction be if they took half that $6 billion and put it toward customer service training of their call centers, technical support agents, and retail associates?
Welcome Virgin Mobile USA onto the scene, which entered the industry in 2002 with an unusual customer-focused strategy: a pay-as-you-go pricing plan with no hidden fees, no time of day restrictions, no contracts, and straightforward reasonable rates. With an advertising budget one tenth that of the larger players in the industry, Virgin Mobile USA, in only a few years, already had exceeded 5 million subscribers and a retention rate considerably higher than the industry average, even though its customers can leave at anytime without any penalty. They have a 90 percent customer satisfaction rating, with more than two-thirds of their customers reporting they would recommend Virgin
Mobile to friends and family.
The banking industry is not much better. Profits from American banks have increased so dramatically from consumer fees and overdraft penalties that Congress had to reintroduce the Consumer Overdraft Protection Fair Practices Act. When the customer service bar is low, that means there is a great opportunity for someone to come in and steal the market. And that is exactly what the online bank ING Direct has done, offering savings accounts with no fees, no tiered interest rates, and no minimums. ING Direct is now the fourth-largest thrift bank in the United States, adding 100,000 new customers per month, with total assets of more than $60 million.
The Harvard Business Review article offers warning signs to recognize customer unfriendly practices in your company:
• Are your most profitable customers those who have the most reason to be dissatisfied with you?
• Do you have rules you want your customers to break because doing so generates profits?
• Do you make it hard for customers to understand or abide by your rules?
• Do you depend on contracts to prevent customers from defecting?
Deteriorating customer service is not only the customer’s issue. Eventually shareholders feel it the worst. For years video rental chains profited on late fee penalties. Which gave way to companies like Direct TV, On Demand, & Netflix to enter the market and run video rental stores out of business.



Wow man, what an informative blog. Keep up the good work!

Comment by Jason

Thanks Jason!

Comment by The DiJulius Group

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