Pinching Pennies Costs Companies More Than They Save
Aug 8th 2011 4:11PM
Updated Aug 8th 2011 6:51PM
Behind conference-room doors and at kitchen tables, corporate big shots and heads of households grapple with the same question: How can we pinch more pennies to boost our bottom line?
However, while consumers are cutting back to save their nickels and dimes, many companies are doing just the opposite: squeezing customers for every extra penny they can get.
While companies need to charge enough to cover their costs and make a profit, there's a point where asking your customers to keep opening their wallets wider drives business away over the long run.
In fact, adding gratis services, or even giving products away for free, builds long-term loyalty and can pay off in spades later on. A few savvy companies have shown how well the strategy can work.
The old adage is true: You have to spend money to make money
In the last few years, Apple (AAPL) and Google (GOOG) have schooled wireless companies in the art of giving customers value without charging for every value-added service.
Apple's App Store provides a plethora of free applications for iPhone users. And even though Apple doesn't develop most of the free apps, it still costs the company money to build and maintain the App Store and host each app on its servers.
What's the long-term payoff for Apple? It hopes an iPhone customer will become a Mac user, who will then choose an iPad over a slew of competitors.
Google has taken it a step further by building an entire operating system for mobile phones, among other open-source products. Big Goo does so with the hope that when you search for a web site on your mobile phone, you may click on a Google ad.
Apple and Google have earned rabidly loyal customers with their generosity, which has in turn fueled both companies' incredible growth and profitability. Sadly, their competition keeps ignoring that lesson.
Stingy Practices in Cellular
When the iPhone came out and redefined the cell phone, Verizon (VZ) was caught with its hand in its customers' cookie jar.
It had a standard operating system on its phones, which you couldn't turn on without stumbling across something with V CAST written all over it. $0.99 here or $3 there for this service or that, and you could rack up a crazy-huge bill without even knowing it. In contrast, the iPhone and its selection of apps provided many of the services Verizon charged for, either for free or dirt cheap.
Last month, Verizon took another hit when Apple announced its free cloud service, a very valuable addition for customers. Can you see Verizon giving its customers free access to a something that cost an estimated $1 billion-plus to build? Not likely.
Speaking of kicking customers while they're down, Verizon's competitor AT&T (T) had the gall to say that it would slow down data usage for its heaviest unlimited data plan users. As an iPhone customer who has been with AT&T since before Verizon added the iPhone, this feels like a slap in the face to me. Am I supposed to stay loyal to a company like that?
The Ultimate Nickel-and-Dime Offenders: Cable Companies
Trying to squeeze a few extra pennies out of customers has been standard operating procedure for cable companies for years. Not only do cable providers seem to sneak in a price increase every few months, but they also want us to upgrade to a triple play, add a football package, or watch a movie on demand. Of course, none of those perks comes free.
I looked through the prices of on-demand movies, and I was shocked at what Comcast (CMCSA) charges for a movie. Why spend $5.99 for 127 Hours when I could purchase it from Barnes & Noble for $13.19 and own it forever? And why would I ever pay $9.99 to watch Burke and Hare?
Prices like that only push customers to competitors like Netlix (NFLX), whose pricing structure looks positively charitable compared to its traditional cable counterparts. You don't even need a calculator to see that paying $7.99 per month for unlimited streaming videos beats shelling out $5.99 to Comcast for a single viewing.
While cable companies may get a few customers to upgrade or buy single movies in the short term, the costs of such penny-pinching behavior are already starting to take their toll. Netflix is showing that an all-you-can-eat selection of streaming content can lure customers away from cable.
Comcast lost 277,000 video customers in the first six months of the year, and Time Warner Cable (TWC) lost 190,000 video customers in the same time frame.
In Corporate America, pinching pennies may not be so smart after all.
Motley Fool contributor Travis Hoium does not have a position in any company mentioned. The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of Google, Apple, AT&T, and Netflix.; buying puts in Netflix; and creating a bull call spread position in Apple.