As a business owner, it is important to think in terms of “bad profits” and “good profits.” While this may seem like a bit of a luxury when you are struggling, it is the only way that you can make your business profitable. It is also important to get out of the mindset that all profit is good profit, because this is not necessarily true.
There are, at the least, two different kinds of bad profits. The first bad profit is customer focused and based on a company sacrificing reliable customer service in order to earn profits, and the second concerns how your company operates and the quality of the goods or services that are offered to your customers. The most important thing to keep in mind is that any bad profit is a symptom of a business owner’s own short-sightedness.
If you want to provide your business with the best chances of success, you should do everything that you can to avoid either type of bad profit. In order to avoid bad profits, you must fully understand what they are and how they may affect your entire business.
Bad Profit Type #1: A Customer that Receives a Bad Deal
In this type of bad profit situation, profit is gained when a business abuses its relationship with the customer. In this instance, profit is earned without actually providing any benefits or positive results for the client. In some cases, this is an issue with the “fine print” and other times businesses simply do this because they can. Either way, it provides for poor customer experiences.
Classic examples of bad profits include customers feeling mistreated, exploited, misled or lied to. Any reduction in customer service, such as putting restrictions on your buyers or imposing charges that are unjustifiable, is also a bad profit.
Some examples of this type of bad profit include
- A bank charging high fees for a check that was not able to clear your account;
- Being charged extra at a hotel for Internet service;
- Charging for insurance on a rental vehicle when your coverage will provide for instances of damages.
You may ask “what’s the big deal?”
The fact is that other than just being wrong, there is also the risk that you may alienate your customers. In fact, these put-off customers may begin talking badly about you and hurting your reputation, which in turn, has the potential to affect your business overall. While you may be able to get away with this poor customer service behavior for a period of time, the social media age guarantees that it will not last forever.
To prevent these types of bad debts from occurring, need to take a look at your internal operations. If there is an area that receives constant complaints, you need to sit down and pinpoint why. You then need to ask yourself whether you would actually buy the product or service from your business.
A word of caution when doing this: you should never try to rationalize the reason for the bad profits, such as “we need to charge this amount because…”
Bad Profit Type #2: You Have a Lazy Company
These tend to be profits that your company obtains that are predictable and easy, but actually come with very low margins. While this is not as detrimental to your business as the customer based bad profit, it can lead to poor longevity for the overall business. In order for your business to grow, it is important to focus on high-end prospects that will provide the opportunity to gain “good-profits” that will also benefit your experience.
The Bottom Line
There are far reaching disadvantages to earning profits from bad profits. Rather than trying to profit on poor service or customers with low margins, instead gain the working capital you need via other methods. Consider solutions such as parting company with partners or aspects of your business that are no longer profitable. Also, if you have outstanding invoices to be paid, you can consider an Invoice Factoring Company, which will pay cash for these invoices, allowing you to eliminate the need to even seek bad profit methods.
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