Latest / Modularity Podcast / Bad Profits, Better Growth

Transcript

Bad Profits, Better Growth · Modularity Podcast

• 0:00
  Why would a business that just posted its highest revenue month ever actually be on
• 0:04
  the verge of collapsing?
• 0:06
  Like, on paper, everything looks incredible, but under the hood,
• 0:10
  it is, it is bleeding out.
• 0:12
  Wait, how does that work?
• 0:14
  If the cash is coming in, isn't, isn't that just good business?
• 0:18
  You would think so, right?
• 0:21
  But it turns out your income statement can completely lie to you.
• 0:25
  Fred Reichheld, he is a fellow over at Bain and Company, he did this massive deep
• 0:30
  dive into corporate earnings.
• 0:32
  And what he found was wild.
• 0:34
  In some service industries, up to one third of reported earnings come from what he
• 0:39
  calls bad profits.
• 0:41
  Bad profits?
• 0:42
  Like, like illegal stuff, or...
• 0:45
  No, completely legal.
• 0:47
  That is the sneaky part.
• 0:48
  Bad profits are revenue extracted from customers through surprise fees,
• 0:52
  fine print penalties, or just shortchanging the experience because you know they are
• 0:57
  stuck with you.
• 0:58
  Think about a five hundred dollar invoice.
• 1:00
  On a traditional balance sheet, a five hundred dollar check from a customer who is
• 1:04
  absolutely furious looks identical to a five hundred dollar check from a customer
• 1:09
  who loves you and recommends you to everyone.
• 1:12
  Right, five hundred bucks is five hundred bucks to an accountant.
• 1:14
  Exactly.
• 1:15
  But that first five hundred dollars carries this massive hidden debt.
• 1:19
  You extracted that cash, sure, but you created a detractor who is now actively
• 1:24
  looking for any reason to leave, and telling ten of their friends not to hire you.
• 1:29
  Oh man, I, I felt this exact thing last year with a software vendor we used.
• 1:34
  Everything was fine until we needed to adjust our limits, and suddenly there was
• 1:39
  this ridiculous, like, two hundred dollar administrative processing fee buried on
• 1:44
  page twelve of the contract.
• 1:46
  I was so mad.
• 1:48
  I paid it because we had to keep the site live, but that exact afternoon,
• 1:52
  I started moving everything over to a competitor.
• 1:56
  The second the migration finished, we canceled.
• 1:59
  They got two hundred extra dollars once, and lost ten thousand dollars a year in
• 2:03
  recurring business from us forever.
• 2:06
  Man, that is the classic trap.
• 2:09
  They squeezed two hundred bucks out of you today and wiped out thousands in customer
• 2:13
  lifetime value.
• 2:16
  Good profits come from enthusiastic cooperation, repeat orders,
• 2:20
  real trust.
• 2:22
  Bad profits are basically a tax on customer patience, and eventually,
• 2:27
  that patience runs out.
• 2:29
  Okay, but if you are running a company and you are addicted to those fees or high
• 2:34
  margin penalty charges, can you actually quit cold turkey without tanking your
• 2:39
  profit margins?
• 2:40
  It turns out you can, and the numbers on it are pretty shocking.
• 2:44
  Look at British Gas Home Services.
• 2:46
  They run home heating installations across the United Kingdom.
• 2:50
  A few years back, they were losing money, hemorrhaging cash,
• 2:53
  dealing with upset customers everywhere.
• 2:56
  So management decided to completely retool around eliminating bad profits and focus
• 3:02
  on customer feedback.
• 3:03
  What happened?
• 3:04
  Customer complaints dropped by seventy five percent.
• 3:07
  And get this, bad debt dropped by over ninety percent because happy customers
• 3:12
  actually pay their bills on time without putting up a fight.
• 3:14
  Cash flow turned positive, and their annual growth rate surged to thirty percent a
• 3:19
  year.
• 3:20
  Wow.
• 3:21
  Thirty percent growth just by stopping the nickel and diming?
• 3:24
  Yeah, because when you eliminate customer friction, your cost to serve plummets.
• 3:29
  To measure this systematically, Reichheld came up with an accounting framework
• 3:32
  called the Earned Growth Rate.
• 3:34
  Instead of just looking at top line growth, which can be bought with expensive ads
• 3:38
  or hidden fees, Earned Growth tracks two specific things: net revenue retention from
• 3:44
  existing clients, plus organic referrals from delighted buyers.
• 3:48
  So it separates revenue you earned because people actually love your work from
• 3:53
  revenue you forced out of them with sales gimmicks.
• 3:56
  Spot on.
• 3:57
  And the research shows that companies with high customer loyalty and strong earned
• 4:03
  growth outpace their competitors' growth rates by more than two to one.
• 4:07
  Okay, so if an owner or developer is listening to this right now,
• 4:11
  what is the quick audit they should run on their own business this week?
• 4:15
  First, look at your revenue lines and flag any charge that makes a customer feel
• 4:19
  trapped, tricked, or punished.
• 4:22
  Ask yourself if that short term margin push is quietly burning your long term
• 4:27
  retention.
• 4:27
  Second, calculate your net revenue retention rate.
• 4:31
  Are your existing customers expanding their spend with you year over year,
• 4:36
  or are you constantly pouring new leads into a leaking bucket?
• 4:40
  That leak is where so many small businesses die.
• 4:43
  If you build something where customers genuinely win, the growth takes care of
• 4:46
  itself.
• 4:47
  100%.
• 4:48
  If you want to dive deeper into building digital systems and long term strategy that
• 4:52
  scale without the tricks, check out modularity.us.
• 4:57
  Good chatting, Dave.
• 4:58
  Yeah, talk soon.