Friday, October 26, 2007

Bad Company

Pursuing some insight into our mess of a health care system, I came across an interesting article in the June 07 issue of HBR “Companies and Customers who Hate Them” by Gail McGovern and Youngme Moon. The article articulates the perhaps obvious point that many companies get into habit of “profiting from consumer confusion.”

McGovern and Moon briefly describe the practices in three widely-despised industries—retail banking, cell phone services and health clubs--to detail how certain companies in these categories have institutionalized a set of practices that “extract” value from consumers by creating confusing plans, hidden fees, and rigid contracts restricting consumer choice. While these practices can be highly profitable, they create the potential for mass defection when a competitor emerges offering a more consumer-friendly and transparent alternative, e.g., Virgin mobile.

Most interesting of all, McGovern and Moon point out that these companies often start with less egregious motives. Confusing product portfolios are often initially created to serve a range of consumer segments, and penalties are instituted to incentive the consumer to behave more responsibly—by not bouncing checks, for example. However, when these companies see how much profit is generated from these practices (cell phone overages), they often orient their business models around them, and adjust operations to enhance the margins rather than helping consumers make better decisions. It often isn’t long before consumer’s spot a better option.

Not revolutionary: but a useful cautionary note on how easy it is for brands to go bad when the $ is good.

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