insights! episode #4: good and bad profits – focusing on profit isn't everything!

This session is about bad profits. What are bad profits? I'd like to explain that using examples. I'll first break the term down into “profit”, whose meaning is presumably clear – that's the earnings. And “bad” means these profits aren't sustainable. We all know it, we're on the hamster wheel – as an entrepreneur, as an owner, as a managing director with shareholders behind you as support, or breathing down your neck, depending how you feel about it. And when the wheel keeps spinning faster, you try to optimise every little cog in the company. That's good up to a point. But you can overstretch the whole bow, and you don't notice it straight away, only much later. A well-known example of this is Airberlin. A great airline with a really great product, with the chocolate hearts you got on your way out, or the magazines that came with it. But Airberlin went into a price war geared towards low-cost carriers, and those add-ons simply didn't fit. But the prices ultimately weren't low-cost-carrier prices, and cutting back these benefits meant you paid a higher price for a product that was nonetheless a low-cost-carrier product. And those are of course issues that don't make customers happy. Because you find exactly these points at certain adjustment screws. When can I check in my luggage? How accommodating are they in certain situations? And that's exactly where companies differ – some say we have a 60-day return period, others a 30-day one. This discussion will surely hit Lufthansa too, who at the same prices keep cutting back more and more, so you have to ask, is this now low-cost at high-price? That doesn't fit. We see this phenomenon in retail too. Gerry Weber, Ernstings Family and other companies in the clothing industry, who are under very heavy pressure, are simply cutting staff in their stores. Cutting so hard – and I already touched on this in a previous session – that sometimes only one person is on site. That person can barely advise customers. And if they can't advise, you might lose that customer. You have to see the full context. You're not physically alone there any more, but you're still there digitally. This affects banks too, Commerzbank for instance. Today came the news – 10,000 jobs to be cut, every third job in Germany. How many branches will be squeezed together? You have to ask, ok, Commerzbank goes digital, but are they as good digitally as native digital banks? If I compare comdirect, Commerzbank's trading arm, with Trade Republic – much more expensive. Are they better? They have a comprehensive range. Do most people need that? Probably not. And that's exactly where it starts – where am I saving my profits at the expense of long-term customer value? Where am I generating them from? And that's the point you shouldn't do. So, bad profits are very, very negative. Why are they especially negative these days? That has to do with the internet and smartphones. Bad news spreads viral much faster, it's spread across the whole continent much faster and so has a much higher and more intense impact than it did 30, 40 years ago, when bad news happened somewhere. Back then one person might complain, but hardly anyone found out about it, except in a small, personal circle. And these bad

News spreads like fire. The airline United, three or four years ago, literally beat a passenger off the plane. That was someone who already had their boarding pass, was sitting in their seat, and then was told, sorry, sir, you unfortunately have to get off, because now one of our own staff members needs this seat, who has to go elsewhere to do their job there. They literally dragged him out by force, he was injured, there were photos, shortly afterwards the share price dropped dramatically. It took a lot of good news before it recovered. And the funny thing about it, not for United of course, but for all the others who noticed it, such as Southwest, they said, our person here is even offered business class if we have to take a seat from them in the back, and she's delighted about it. That means, exactly this interplay of bad news costs an immense amount in market capitalisation, and on the other hand it gives the market competitor (here I'd simply write "competitor") an immense advantage. So pay attention, are these measures to generate profit really good measures? Or are they ones that pay into the customer experience, as we saw in Session 3? Watermark Consulting says, poor customer experience, poor share price.