Bad Business: When the Customer's Always Wrong(ed)

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Tough economic times can show us exactly what many companies are made of, and investors better have been paying attention over the last year or so. In 2011, movements like Occupy Wall Street exemplified a larger truth: Americans are sick of being taken advantage of by huge corporations, and they're not in the mood to take it anymore.

Investors should be tracking the Outraged Consumer trend and what it means to their own portfolios. If a company's trying to get away with abusing its own customers, it should look like poison to its shareholders as well as potential investors.

Burning bridges
The sluggish U.S. economy has made the competitive landscape even more difficult for many companies. Instead of exhibiting "grace under pressure," though, too many companies have lashed out with ugly, base desperation.

Let's call this the siren song of trying to sneak lucrative abuse past consumers. Take the following examples.

  • Netflix (NAS: NFLX) jacked up the price of its service for combination DVD/streaming customers by 60%.
  • Bank of America (NYS: BAC) and Wells Fargo (NYS: WFC) were among those who tried to slam banking customers with a monthly fee for using debit cards to make purchases.
  • Verizon's (NYS: VZ) mobile arm, Verizon Wireless, attempted to attach a $2 monthly fee for online and telephone bill payment options.

These companies weren't giving customers a better value or experience; they were simply raising the cost of doing business with them. Even if they were attempting to offset industry (or company-specific) issues that have been knocking their businesses, let's face it: to consumers, they simply looked downright greedy.

Not surprisingly, consumers responded with outrage and revolt, resulting in high-profile backdowns. And then there's Netflix, which suffered a mass exodus of customers in the face of the higher price for its once-lauded service.

Captive customers, customer heroes
Any company whose management seems to believe its customers are cash cows trapped in their fenced-in pastures, ripe for plunder, is a very bad investment idea. History's full of corporate failures resulting from practices that were abusive to customers.

There are plenty of logical reasons why Blockbuster lost the corner on the market in video rentals, and a major one was that it was known for customer-unfriendly behavior. Another sure sign of a dying business model occurred when the recording industry began suing its own customers instead of adequately evolving for the changing times.

Thankfully, many companies are well aware that the customer actually is always right. That's essential to building a long-term business, whether times are good or bad.

Market researcher ForeSee recently highlighted Amazon.com's (NAS: AMZN) continued exemplary customer service in the online space. According to ForeSee's Larry Freed, "Amazon is still the 800-pound gorilla of retail, and it just keeps getting better. It's tough for a smaller retailer to compete with this level of dedication to providing an excellent customer experience."

The American Customer Satisfaction Index, which is also supported by ForeSee, has drawn a correlation between firms with high levels of customer satisfaction and higher earnings and investment returns, as well as high returns in up markets and down markets.

In 2011, many companies forgot who really matters. In 2012, investors should remember there's an ugly future ahead for companies where the customer's always wrong(ed), and adjust their portfolios accordingly.

Of course, the idea that happy customers are the life's blood of a truly great business isn't really rocket science. There's a reason that one of the companies highlighted in one of the Fool's special reports, "The Real Cash Kings Changing the Face of Retail," excels: "Put customers first and success will follow." Take a look at this report right now -- it's free, but it won't be around forever.

Check back atFool.comevery Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Amazon.com, Wells Fargo, and Bank of America, and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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