Businesses Shouldn't Profit at Their Customers' Expense Healthy relationships are normally based on mutual benefit. Something is askew if one party's success requires the other party's failure.
By David Hagenbuch Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
On a recent visit to Alabama, President Obama expressed executive anger about pay day lending, an industry that preys on people caught in poverty. The president rightly rebuked these lenders for charging exorbitant interest rates that tend to bind borrowers in an endless cycle of escalating debt.
Pay day lending depends on win-lose outcomes in which the producer's and consumer's goals are mutually exclusive, i.e., the only way for these lenders to really make money is for their customers to get caught in a downward spiral of debt. While the lenders achieve their goals, their customers fail to realize theirs and instead remain trapped under the burden of their balances.
Unfortunately pay day lending is not the only industry with a one-sided business model. A few others predicated upon their own customers' failure include:
Related: Let's Be Real: Why Transparency in Business Should Be the Norm
1. Rent-to-own (RTO)
A close kin of pay day lending, rent-to-own retailers (e.g., Rent-A-Center, Aaron's) lease household items like electronics, appliances and furniture. Such arrangements may serve certain customers well, particularly those with a short-term need like a special event. Many RTO patrons, however, want to own the items, but they can't afford to buy them outright.
It's this latter group of consumers that represents the real revenue stream for the $8.5 billion RTO industry, yet it's this same target market that's sucked into a losing proposition. Over the course of their lease contracts, RTO customers can end up paying double what the item would have cost had they bought it outright. However, due to extremely steep monthly charges that often equate to interest rates of 200 percent or more, many RTO patrons never complete their contracts, and when they fail to make a payment they lose all of the money they've invested as well as the item itself. The RTO retailers, in contrast, do well when their customers default, making a RTO product contract "the gift that keeps on taking."
2. Gambling
Most organizations invest considerable time and money to encourage their better customers to buy even more. So, why do casinos sometimes ban their best customers? It's because gambling has an inherent conflict of interest: When two parties take opposite positions in a bet, only one can win. Casinos can't tolerate bettors who consistently clean up against the house. Those individuals, including celebrities like Ben Affleck and UFC President Dana White, are asked to take their business elsewhere.
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Some might argue, however, that the act of gambling produces pleasure, whether or not the speculator succeeds. This argument may work for small bets, but when people start losing money that represents a high percentage of their wealth, the fun quickly fades. Along these lines, it's notable that gambling is one of very few industries whose service is readily associated with self-destructive behavior and addiction. It's pretty telling when a business needs to warn its customers to be careful not to use it too much.
3. Multi-level marketing
There's not necessarily anything wrong with people selling products directly to others or with existing representatives recruiting new ones to help market a worthy product line -- notwithstanding Wall Street's ongoing debate over Herbalife. While some multi-level marketing may be legitimate, particular practices certainly suggest a business model built on one-sided outcomes.
For instance, some multi-level marketers have realized they can make more money by cycling through distributors than by finding real customers. The approach works by requiring representatives to buy nonrefundable sample kits. When the distributors leave the organization, as many do, they lose a couple of hundred dollars that are tied up in products they really don't need. The company wins, however, by making a nice one-time sale and by retaining any new business that the distributors happened to develop during their short-lived careers.
Unfortunately RTO, gambling and multi-level marketing are only some of the industries built on win-lose business models. Pawn shops, for instance, appear to do best when they get to keep the items they take as collateral for very high interest loans, which might cost, for instance, $16 for a one-month $80 advance. Similarly, some credit card companies seem to succeed most when their customers can't pay off their monthly balances and instead must perpetually service their expensive revolving credit that routinely ranges between 10 and 28 percent.
Healthy relationships are normally based on mutual benefit. Something is askew if one party's success requires the other party's failure. In a commercial context, consumers naturally want to avoid these imbalanced exchanges. As such, marketers who base their business models on win-lose outcomes should do some serious soul searching.
Related: Are Business Ethics at a Low Ebb?
