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Open Book Management

Beware of Bad Profits

Learning never stops. Sometimes it’s painful—learning that comes from working through difficult circumstances, making mistakes, exercising poor judgment, confronting bad luck or facing up to things we didn’t want to know about.

At Zingerman’s, we’ve been learning a lot through what we have taken to calling the ZXI, or Zingerman’s Experience Indicator. (See sidebar on p. 20 for a brief explanation of ZXI. You can also find a more lengthy explanation in the June issue of Specialty Food Magazine, or get a copy by contacting us.)

Long-Term Learning
Our work with ZXI is based on the approach to service quality measurement in the book, The Ultimate Question, by Fred Reichheld. The implementation and learning process will undoubtedly be lengthy; all change comes with complications, frustrations, unexpected questions, adjustments and varied applications across organizational lines.

We’re already learning a lot through the ZXI. It takes about two years for meaningful lasting change to take place in our organization and we’re only at the halfway point. I know it’s been a good move to put a new approach, idea, system, or recipe in place when the positive lessons that result are very high; they continue to unfold regularly after the initial implementation, as they have with the ZXI.

This speaks in part to the value of sticking with things; most people and organizations get frustrated and fail simply because they give up on improvement initiatives too soon.

(This belief has been proven throughout history, as I just learned through homework on Hawaiian food for a special dinner at Zingerman’s Roadhouse. In 1843, a British naval officer landed in Hawaii and claimed the islands for the Crown but he left after about six months. Six years later a Frenchman repeated the same pattern. Long story short, the Hawaiian islands ended up as American only because these other two 19th century world powers didn’t stick with what they had started.)

I’m reminded too of Jim Collins’ Good to Great story of the hedgehog and the fox. The hedgehog moves slowly and unglamorously forward while the fleet of foot fox darts athletically all over the place. In organizational life, Collins points out, it’s usually the steady progress of hedgehogs that works—they just keep slowly, steadily, determinedly moving in the same direction, and, in the end, they far surpass the foxes of the business world who seem to change direction every time a new opportunity pops up.

Having worked on the ZXI for a year now, I can say that a. valuable learnings continue to come in, b. we’re just at the beginning of what we’re going to learn in the years to come, and c. the experiences that we’re delivering to customers (and staff) are already much better.

Good and Bad Profits
There is a difference between what Reichheld calls “good” and “bad” profits. Most successful businesses that have been around probably already push good profits. Most have done so in what we call “unconscious competence;” in other words, we put it in practice but are not aware that we’re doing it. As a result, it is impossible to explain to anyone what we’re doing. Reichheld’s book has helped us to put names and common language to something that we’d never overtly talked about.

Can any profit be bad? Yes, of course. Sometimes, like you and I, it’s just a “little bad.” But it can go beyond mildly bad into downright destructive. The pursuit of bad profit can send an organization, slowly, steadily down the road towards failure. Reichheld believes that businesses can be “addicted” to bad profit—they don’t have the will and/or the ability to stop their dependence on it.

You cannot spot bad profit by reading a financial statement—the numbers for “good” and “bad” profits are all combined on one line. But, in the long run, the two take organizations in opposite directions.

Bad profits are a lot like strip mining. They produce results that look fine when judged in an isolated short-term financial context. Sales are made; money drops to the bottom line. But while the short-term gains are attractive, the long-term implications are hurtful.

Unethical business practices would make a bad profit. Reichheld writes a lot about how companies deceive or delude customers in order to sell services or products that they know are sub-par. For the business world at large, that’s an important ethical issue to be addressed. Selling out-of-date drugs in Third World countries, putting out poorly made food to “move” the product, etc., all fit into this category.

There are all sorts of slightly less obvious examples that we encounter regularly. Here are two that come to my mind: the price per gallon rental car companies charge when you return a car with anything less than a full tank; and pricey hotels that charge for wireless internet service. Other than shake my head with frustration, all I can say is, “Why?” In both cases, as a customer, I’m paying to use the company’s service in the first place. Why don’t they just build the extra charge into the overall price? Instead, they add an absurd retail price ($2 more per gallon of gas; $9.95 for wireless service in a room that might cost $250 a night—and it’s free at the $50 a night motel up the road).

The customer experience is diminished because distrust is created. The car company and the hotel get short-term income, but someone will soon “figure this out” and within a year every competitor will immediately follow suit because the newly “discovered” solution is so glaringly user-friendly. These are bad profits, gained by taking advantage of the customer.

There are many far less obvious and less extreme examples of bad profits. And these are not coming from evil cabals of uncaring corporate execs in isolated office towers. To the contrary, bad profits are often generated by good people trying to do the right thing.

At Zingerman’s, we have at times fallen into the trap of going too far to meet the requests of a client demanding very low prices. Our efforts are not ill-intended—whether it’s in catering or wholesale or consulting, the desire is to make customers happy. If we can provide a lower price and still make a little money, then by all means we should consider their request.

The problem—and the reason this approach almost always ends up leading to bad profit—is that we usually end up cutting margins so thin that the business we gain ultimately causes quiet but meaningful harm. That could happen, for instance, when we bring our costs down by cutting back the quality of the product we sell to a level that isn’t in synch with our standards. We’ve met the customer’s request, but are out of alignment with our values. Alternatively, we might offer lower prices by losing money on the deal. The problem is that if the customer likes the newly low-priced experience, then they will come back for more. And the more they come back, the more money we lose, the worse our financials, the more work the staff is doing to produce the same results, the longer people are going without bonuses, and so on.

Either of these seemingly service-oriented solutions will create negative long-term outcomes—both the product and the margin are subpar. Eventually, we go out of business, or we have to drop a long-term, big-buying customer, neither of which is desirable. And even though we cut the price substantially, the customer will still think we overcharged them. When a slightly lower-end offering comes along, the customer will leave in a heartbeat.

Bad profits also—and often—come from trying to be all things to all people, or from following the market place in ways that are not true to who we are. Customers ask for something that compromises the vision or values of the organization, but the company provides it anyway. Although this response can come from an honest attempt to give great service, when an organization starts trying to be all things to all people it ends up being all over the place.

Our learning from the ZXI is that 90 percent of the time when we hear complaints about price, it’s actually because we have failed to deliver a great experience. When we come through on the many facets of the guest’s experience, price is far less of an issue. When we do fall short on delivering a great experience, the right path is to honor our guarantee, refund their money and offer them a free meal/bread/cake/coffee, etc. so that we can earn a second chance. The first response should always be to handle the guest’s complaint effectively, evaluate how the experience went awry, and then systemically work to improve our delivery to get better results and better experiences down the road.

Avoiding Bad Profits
We need to give great service to all our guests, all the time. We will always go to amazing lengths to please customers, whether they’re detractors, neutrals or promoters—going out of our way to make customers happy is a huge piece of what differentiates us.

When anyone is unhappy with their experience here, our vision, our values and good business practice all dictate that it’s imperative that we respond effectively and courteously. When it comes to “bad profits,” we seek out creative ways to respond and make the customer happy. We do that in ways that stay away from long-term “commitments” or significant shifts in product and services that are out of alignment with our values and/or vision.

For instance, our organizational vision says that we will not open any Zingerman’s businesses beyond the Ann Arbor area. When people ask us to we politely decline, letting them know how honored we are that they’d like us in their town. And then we courteously offer a constructive, high value, not inexpensive option—ZingTrain seminars or consulting so that they can take our approaches, adapt them and use them to open their own like-minded business.

On a smaller scale, we’ve had a few customers at Zingerman’s Roadhouse upset that we didn’t have their favorite imported beer on hand. We do traditional American food (and drink) with only U.S. beer and wine. Nevertheless, we took the complaints and turned them around, without going down the road toward bad profits. For one guest, who wanted a Guinness, we simply ran quickly to the grocery store and bought one for him. For the other regular customer, we ordered a case of his favorite British ale and kept it quietly in the cooler for him. In both cases, we charged the guest a full markup for their beer. And each guest felt like they had received special treatment. We still stayed true to our American culinary vision, and avoided the strong temptation of bad profit by putting non-American beer on our limited list. Both customers remain big promoters of what we do, and spread the word regularly.

I’m not suggesting one commit strategic suicide in the interest of “good profits.” If sales are weak and an overwhelming majority of customers are asking for a change, it’s imperative to consider their request. Yet altering an entire business to accommodate some vocal detractors when core customer promoters already like what we do will lead anybody into the realm of bad profits.