Sunday, February 14, 2010

Profit at the Expense of the Consumer, Part 2: Talking to India

We've all experienced poor customer service. Getting a customer service representative on the phone in the first place can be difficult and time consuming. Large companies like Chase and Citibank force customers to fight their way through computerized menus before we can talk to a human being. Some companies do not even publish their customer service phone numbers.

And, when you finally get someone on the line, they are likely to be uneducated, untrained and underpaid. Often times, they are located in India or El Salvador and might not even speak English well enough to get the job done. comes to mind as a company with laughably bad phone service. Their employees only speak enough English to handle two or three specific tasks. Beyond that, you'll need to speak Tagalog or Spanish, depending on which call center you get.

Part of the reason for poor customer service is a simple desire to save money. It costs a lot of money to staff a customer service line, and it is cheaper to hire someone in India whose English is less than perfect.

But there is another, and I believe more important, reason why some companies make it difficult to communicate: they want customers to just give up. Most of the time when you call your bank, for example, it is because you were charged a $7 fee you should not have been charged, and you want it removed (how many times have you called a company complaining that you were undercharged?). Many companies, United Airlines being a prime example, have an active strategy of making it difficult to communicate in order to be able to get away with overcharging or otherwise not providing what they promised.

Another way in which big American companies try to bamboozle consumers is with incomprehensible bills. If you cannot understand your bill in the first place, it is hard to know if you are being cheated, let alone convince the company to refund the $18.47 they overcharged you this month. For example, my Sprint contract is quite simple. I pay a fixed amount of money for a fixed amount of "anytime" minutes each month. Everything is supposed to be included in one price. Or at least that is how they sold me the contract. But, my current Sprint invoice has no less than 42 entries, not including the various taxes. They charge me odd amounts for various items, then credit me back for other items. None of it has anything to do with our actual agreement, and none of it makes any sense. AT&T and DirecTV both do the same thing. Their bills are actively designed to be difficult to understand so that we will not question them. It would be easy to make the bills easy to understand, but that is not what AT&T wants.

These incomprehensible bills nearly always contain mistakes, and the mistakes are nearly always in favor of Sprint, AT&T and DirecTV. I know that from experience, and if you look closely at your own bills, I am certain you will find the same thing. But, finding the mistakes, getting through to customer service and trying to get them to refund the excess charges is rarely worth the time and effort. And DirecTV is smart about the way it overbills its customers. The amounts are generally small, on the order of $10 to $30 each month. That way, some consumers will not realize that they are being cheated, especially given the complexity of the bill. Others may realize that they are being overcharged but are unwilling or unable either to figure exactly where on their complex bill the overcharge appears, or to fight through the customer service jungle to get back $18.47.

It seems that the majority of large American companies have adopted the same cynical policy of abusing their customers in order to squeeze out a few extra dollars each month. True, it is not all of them. Apple, for example, has a policy of providing excellent customer service, often giving their customers more than they agreed to provide, e.g., serving a product a month after the warranty expired. The business practices of the majority of the companies, however, are just the opposite, and the cost to society are high. The uncivilized and dishonest practices of Sprint, AT&T, United Airlines and DirecTV may net them a few extra dollars in the short run, but they make life unpleasant in small but persistent ways. These companies teach people to have low expectations, and to cheat whenever you can get away with it. And, in the long run, these companies destroy their own reputations, at their own peril.

Sunday, February 7, 2010

Profit at the Expense of the Consumer, Part I: Gift Cards

Gift cards have become increasingly popular with consumers in recent years, and for good reason. Say you are looking for a gift for a friend. You know she loves music, and you know what kind of music she likes, but if she really likes an artist she may have already bought most of his albums for herself. That makes it hard to select the right gift. If you buy her a gift card, she can choose for herself, and she always gets the right gift. In a culture such as ours that frowns upon giving cash, gift cards are a good option, both for the giver and the recipient.

Gift cards are popular with merchants for an entirely different reason: about 10% them are never redeemed. Best Buy sells a $100 gift card for $100. Seemingly, there is not profit on that transaction, just a small cost in creating and handling the card. But on average, $10 of that card will never be redeemed. That money does not get forfeited to the State, nor donated to charity. Rather, it is nearly pure profit for Best Buy; a plastic card sold for $10. The business of selling gift cards is less risky and more profitable than selling televisions, computers and cell phones.

Gift cards are only profitable because consumers make mistakes. Consumers buy cards that they do not need, they lose the card or just put it in a drawer and forget about it. If everyone cashed in their gift cards, the business model would not work. It is a business designed to take advantage of people's mistakes; no mistakes, no profit.

Compare that with the ordinary business of Best Buy, which involves selling consumer electronics. Certainly, Best Buy could increase its profits by selling shoddy or overpriced goods, or by misleading or otherwise cheating customers. But none of those things are necessary in order to make money as an electronics goods store. On the contrary, at its core, the business of selling electronic goods is based on the principle of selling consumers what they want and making a profit at the same time: a win-win business model.

No, I do not think gift cards are the devil, or that they should be banned. But, consumers should be aware of what is going on. And, when you buy a gift card, you are buying a very high profit item and you should expect to get a little something in return. For example, Peet's Coffee gives a dollar off for every $20 added to a Peet's card. That makes sense; the consumers share in the windfall profits generated by the gift card business.