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Rita McGrath

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October 16, 2014

Pressuring customers for profits can be a loser in the long term

I was recently asked by a reporter whether there are times when a company is too generous to its customers. The company in question was JetBlue, and the issue was whether perhaps it was being too kind to customers in the legroom department, with the result that it doesn’t squeeze every last drop of profits out of every flight.

The real question to me in cases like this is whether a company should be designed to serve multiple stakeholders (investors plus customers, suppliers, the community) well or whether we allow executives and owners to claim a disproportionate share of profits generated. A recent HBR article on profits without prosperity has gotten tremendous pick up in the press. Basically the author argues that investors and executives have become “takers” in their organizations rather than “makers” who invest to fund future growth. My personal belief is that this is an imbalance that is increasingly going to be questioned as the way our financial markets are working now is not delivering the good jobs and growth that we have come to rely on. I think the role of the Board is to adjudicate among those different interests, keeping in mind the long-run health of the organization.

It is nearly always profitable in the short term to cut on quality, offer less service or otherwise extract greater profits from the same dollar of customer spending. But in the longer-term it can be very dangerous. JetBlue has built its distinctive brand among airlines by offering a noticeably superior flying experience. Cutting seat sizes and otherwise mimicking the strategies of the other airlines has the potential to erode the brand, giving customers less reason to travel with JetBlue. When everyone’s experience is uniformly horrible, competition devolves to pure pricing and that’s not a fun world for anyone.

It is also really important to consider long-run customer value to a company as opposed to profitability in the short term. You’ll see for instance that United, which is still coping with the downside of its merger with Continental, lost market share this year – customers are voting with their feet. And by the time a customer has given up on an airline, it is a long road back to regain their trust.

Filed Under: Strategy Dynamics, Uncategorized

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