Bad Profits, Better Growth

Ryan Haylett

Why would a business that just posted its highest revenue month ever actually be on the verge of collapsing? Like, on paper, everything looks incredible, but under the hood, it is, it is bleeding out.

Dave Rowley

Wait, how does that work? If the cash is coming in, isn't, isn't that just good business?

Ryan Haylett

You would think so, right? But it turns out your income statement can completely lie to you. Fred Reichheld, he is a fellow over at Bain and Company, he did this massive deep dive into corporate earnings. And what he found was wild. In some service industries, up to one third of reported earnings come from what he calls bad profits.

Dave Rowley

Bad profits? Like, like illegal stuff, or...

Ryan Haylett

No, completely legal. That is the sneaky part. Bad profits are revenue extracted from customers through surprise fees, fine print penalties, or just shortchanging the experience because you know they are stuck with you. Think about a five hundred dollar invoice. On a traditional balance sheet, a five hundred dollar check from a customer who is absolutely furious looks identical to a five hundred dollar check from a customer who loves you and recommends you to everyone.

Dave Rowley

Right, five hundred bucks is five hundred bucks to an accountant.

Ryan Haylett

Exactly. But that first five hundred dollars carries this massive hidden debt. You extracted that cash, sure, but you created a detractor who is now actively looking for any reason to leave, and telling ten of their friends not to hire you.

Dave Rowley

Oh man, I, I felt this exact thing last year with a software vendor we used. Everything was fine until we needed to adjust our limits, and suddenly there was this ridiculous, like, two hundred dollar administrative processing fee buried on page twelve of the contract. I was so mad. I paid it because we had to keep the site live, but that exact afternoon, I started moving everything over to a competitor. The second the migration finished, we canceled. They got two hundred extra dollars once, and lost ten thousand dollars a year in recurring business from us forever.

Ryan Haylett

Man, that is the classic trap. They squeezed two hundred bucks out of you today and wiped out thousands in customer lifetime value. Good profits come from enthusiastic cooperation, repeat orders, real trust. Bad profits are basically a tax on customer patience, and eventually, that patience runs out.

Dave Rowley

Okay, but if you are running a company and you are addicted to those fees or high margin penalty charges, can you actually quit cold turkey without tanking your profit margins?

Ryan Haylett

It turns out you can, and the numbers on it are pretty shocking. Look at British Gas Home Services. They run home heating installations across the United Kingdom. A few years back, they were losing money, hemorrhaging cash, dealing with upset customers everywhere. So management decided to completely retool around eliminating bad profits and focus on customer feedback.

Dave Rowley

What happened?

Ryan Haylett

Customer complaints dropped by seventy five percent. And get this, bad debt dropped by over ninety percent because happy customers actually pay their bills on time without putting up a fight. Cash flow turned positive, and their annual growth rate surged to thirty percent a year.

Dave Rowley

Wow. Thirty percent growth just by stopping the nickel and diming?

Ryan Haylett

Yeah, because when you eliminate customer friction, your cost to serve plummets. To measure this systematically, Reichheld came up with an accounting framework called the Earned Growth Rate. Instead of just looking at top line growth, which can be bought with expensive ads or hidden fees, Earned Growth tracks two specific things: net revenue retention from existing clients, plus organic referrals from delighted buyers.

Dave Rowley

So it separates revenue you earned because people actually love your work from revenue you forced out of them with sales gimmicks.

Ryan Haylett

Spot on. And the research shows that companies with high customer loyalty and strong earned growth outpace their competitors' growth rates by more than two to one.

Dave Rowley

Okay, so if an owner or developer is listening to this right now, what is the quick audit they should run on their own business this week?

Ryan Haylett

First, look at your revenue lines and flag any charge that makes a customer feel trapped, tricked, or punished. Ask yourself if that short term margin push is quietly burning your long term retention. Second, calculate your net revenue retention rate. Are your existing customers expanding their spend with you year over year, or are you constantly pouring new leads into a leaking bucket?

Dave Rowley

That leak is where so many small businesses die. If you build something where customers genuinely win, the growth takes care of itself.

Ryan Haylett

100%. If you want to dive deeper into building digital systems and long term strategy that scale without the tricks, check out modularity.us. Good chatting, Dave.

Dave Rowley

Yeah, talk soon.