Summary:
Prioritizing user loyalty over short-term profit maximization leads to sustainable growth by fostering trust, customer retention, and long-term profitability.
The most important business goal of most digital products is to maximize user loyalty and the lifetime value of the user’s future visits and purchases. Maximizing the value of a single, specific visit is less important. In fact, it is often counterproductive to chase short-term gains at the cost of the long-term customer relationship.
The Tradeoff Between Short-Term and Long-Term Profits
Profit maximization is a strategy companies use to earn the most profit possible. It might involve adjusting production, pricing strategies, and managing costs to increase revenue while reducing expenses.
While most companies do and should strive toward profit maximization, they must differentiate between long-term and short-term profit maximization. In most cases, there is a tradeoff between these two, meaning that companies often must sacrifice a portion of their short-term profits if they aim to increase long-term profits.
For example, most companies invest in research and development. These investments reduce the business’s short-term profitability, but they promise the potential of increased long-term profitability.
Customer Acquisition Fosters Short-Term Profits
Customer acquisition is the process of attracting and converting potential customers into paying clients or encouraging existing clients to upgrade to higher-tier offerings.
Successful customer acquisition is a necessity for most organizations, but it must be approached mindfully to ensure that new clients deliver ongoing value in the future. Otherwise, companies risk sacrificing long-term profits for short-term profits.
For example, if a phone manufacturer promises a uniquely long battery lifetime in their newest models to attract new customers, but their phones fail to live up to the set expectations, the company’s strategy might increase customer acquisition and thereby short-term profits but sacrifice customer retention and long-term profits.
Customer Loyalty and Retention Foster Long-Term Profits
Companies that focus too much on short-term profitability risk negatively impacting customer loyalty and retention, thereby reducing their long-term profitability.
Customer loyalty is built through positive experiences that generate trust and satisfaction, leading users to choose the same brand over competitors consistently.
Unfortunately, when it comes to digital design, companies often sacrifice customer retention in pursuit of short-term wins and metric boosts. Take, for instance, car-rental websites that hide fees to make prices appear more attractive. While this approach can initially boost customer acquisition and short-term profits, it also creates a frustrating user experience when customers are confronted with unexpected fees at rental pickup. This tactic not only diminishes customer trust but also reduces the likelihood of repeat business, ultimately harming long-term profitability.
A Mindful Approach to Customer Acquisition and Customer Loyalty
Customer retention and loyalty are key drivers that impact both short-term and long-term profits. Only when approached mindfully can they lead to a sustainable balance between short-term and long-term profits.
Don’t Harm Retention During the Acquisition Phase
- Avoid Deceptive Patterns
Deceptive patterns are design patterns that manipulate users into taking actions that primarily benefit the company employing them. While these practices can drive short-term profit gains, they often come at the cost of user satisfaction, leading to decreased user retention and, consequently, lower long-term profitability.
Evernote, a notetaking and task-management app, offered a free plan that did not directly generate profit. However, the app’s user base within the free plan represented a potential long-term revenue source if a portion of free users could be smoothly transitioned to paid plans. If the company provided an excellent user experience and users naturally outgrew the free plan’s capabilities, they would be more likely to upgrade, especially if they were aware of higher-tier plans and could switch easily.
Another frequently used deceptive pattern is forced continuity. It forces users to continue a service without clear consent. For example, many companies offer free trial periods for their products but hide the information that customers automatically move into a paid plan after the trial period ends unless they actively cancel their subscription.
The Risk of Applying Deceptive Patterns
Though deceptive patterns may seem beneficial for immediate profit maximization, they lower user loyalty, taint the brand’s image, and reduce long-term growth. Sustainable success lies in transparent practices that meet user expectations. For example, encouraging natural transitions from free to paid plans nurtures trust and fosters a loyal user base.
- Dynamic Pricing: Balance Profit and User Trust
Pricing plays a critical role in balancing profit maximization and user loyalty. The key to effective pricing is not simply deciding between high or low prices but ensuring that prices align with user expectations.
A common pricing strategy is dynamic pricing, where companies adjust prices based on market demand, competition, and other external factors. While this strategy aligns with standard economic theory and can boost profits, it must be applied thoughtfully to avoid eroding user trust and loyalty.
Dynamic Pricing Gone Awry: The Oasis Example
When the British rock band Oasis announced their 2024 comeback, Ticketmaster used dynamic pricing to sell tickets. Due to extremely high demand, many fans ended up paying more than double the advertised price, even if they attempted to buy tickets as soon as they were released. This resulted in significant public backlash and a government investigation into Ticketmaster’s pricing practices.
The issue lies not in dynamic pricing itself but in failing to meet customer expectations. Industries like airlines, hotels, and ride-sharing services face little backlash because consumers are used to price fluctuations.
For example, most people accept that flight tickets increase in price as the departure date nears. This acceptance comes from the transparency and familiarity of pricing practices in these sectors.
Transparent and Tiered Pricing for Greater Perceived Fairness
To apply dynamic pricing more effectively and maintain user trust, companies can use tiered pricing and be transparent about their approach. For instance, festivals often sell tickets in predetermined tiers, each with a set allocation. This structure helps manage expectations by informing customers about potential price increases and ensuring that the process feels fair.
- Avoid Aggressive Upselling and Crossselling
The airline and car rental industries are notorious for upselling and crossselling products. For example, when booking a flight on Spirit.com, users had to go through four tedious rounds of upselling. They had to actively decide not to purchase seats, bags, cars, hotels, or any additional flight add-ons to be able to purchase the flight for the initially advertised price. While aggressive upselling could have a positive impact on short-term profits, it will have a negative impact on user perception of the brand and the likelihood of them booking flights in the future.
Upselling Done Right
This doesn’t mean companies should avoid offering add-ons, like reserved seats or luggage for a flight. However, the approach should ensure that the customer feels informed about these options while retaining a clear, easy way to bypass them if desired. For instance, Delta.com presents options to reserve a seat or purchase luggage during the checkout process. These choices are thoughtfully embedded within the review stage, allowing customers to easily scroll past them if they’re not interested, and thus creating a seamless and unintrusive experience.
Ensure Long-Term Profits Via High User Retention
- Invest in an Excellent User Experience to Increase Long-Term Profit
Maximizing profits can be achieved by either increasing revenue or reducing costs. One short-term strategy to cut costs is to forego investments in enhancing a product’s user experience. While this strategy may temporarily boost profit margins, it ultimately leads to diminished user satisfaction, lower customer retention, and reduced long-term profitability.
To achieve sustainable growth, companies should prioritize investing in an excellent user experience. Such investments significantly boost customer loyalty and long-term revenue. Research highlights the value of UX design. For example, a study that tracked 300 publicly listed companies over five years showcases that companies prioritizing design see a 32% increase in revenue growth and a 56% higher total return to shareholders compared to their competitors.
- Avoid Unnecessary Product Changes
Products need to evolve over time to stay relevant, but product teams should avoid making changes solely for the sake of novelty. While updates are essential for keeping products current, users often inherently resist change, especially when it requires them to relearn familiar features and navigation.
This is particularly true for complex or frequently used products, such as project-management tools or streaming services, where user proficiency is built over time. Therefore, any product changes should be driven by genuine user needs, ensuring that the benefits outweigh the frustration of productivity loss.
Another effective approach is to implement small, incremental updates more frequently, rather than infrequent, large-scale overhauls, which helps reduce the cognitive load on users and makes adaptation smoother.
- Set Yourself Apart with Memorable Customer Experiences
Another way to ensure high user retention and long-term profits is by providing memorable customer experiences. This is especially true when customers encounter a problem, as these situations can make-or-break the relationship with an organization.
My mother recently shared a story of a memorable customer interaction with me. As a child, my favorite toy was an electric LEGO train. One day, it fell into the toilet and broke. My mother reached out to LEGO to ask where she could purchase a new train. Instead of explaining where she could buy a new train, the LEGO representative told her that he would immediately replace the broken toy free of charge. This experience was so memorable to my mother that she not only became a loyal LEGO customer but also shared this story more than 25 years later with me. It shows the positive impact that one positive customer experience can have on their loyalty to a brand.
- Consider Loyalty Rewards
Offering loyalty rewards is an effective strategy for increasing customer loyalty and driving long-term profits. Industries such as retail, hospitality, and food and beverage frequently implement these programs. While loyalty rewards may temporarily impact short-term profitability — such as when supermarkets offer members discounted prices — they encourage repeat business and foster stronger customer relationships. The increased loyalty from these programs translates into higher long-term profitability as loyal customers continue to choose the brand over competitors.
Conclusion
There is ample research and examples of how short-term profit maximization can negatively impact users’ loyalty and long-term profitability. When making strategic product decisions, keep this tradeoff and the importance of customer loyalty in mind.
References
McKinsey & Company. (2018). The business value of design. Retrieved from https://www.mckinsey.com/capabilities/mckinsey-design/our-insights/the-business-value-of-design?source=post_page—–1ea7450613c5———————-