It Was Better Pricing That Helped Qwest

This morning, The Wall Street Journal reported that Qwest Communications saw it’s profits increase by 37%.  The title indicated that the result came from cutting costs.  But what they really did was to cut customers.   They were “willing to loose lower-end customers to boost earnings”.

The problem most executives have in a downturn and in a stable market is they assume that if they grow revenue, profits will grow as well.  That might be true in a growing market due to market elasticity.  But in mature and troubled markets like we have now, profits, not revenue should be the focus.  Why?  Because in the pursuit of revenue, profits, the lifeblood of the firm, decline.  In the pursuit of profits, however, revenue can decline but who cares? We’re making more money.

What CEO Edward Mueller did was to kick the discounting habit–something we talk about in our article in the Journal of Business Strategy (click away to get a copy).  Profits are more important than revenue–always.  There are times when price discounts can be used to increase profits–but not now. 

In these difficult times, the best activity of all executives is to focus on stoping the profit leakage.  Fire customers who don’t cover their cost to serve.  Draw a line in the sand and say you aren’t going to take it any more.

Even if you take a revenue hit, you’ll be better off.  Sure Qwest dropped revenue 6.6% but the 37% increase in profit pushed up the stock price over 3% when it was announced and up almost 100% off the lows of the year.

I was speaking with a company recently about strategic pricing initiatives and made the point that they really needed to focus on cutting the losses of bad pricing at accounts.  The manager thought I was being too tactical–yup, I was.  Here’s the point–if you can’t kick the discounting habit, all the strategy in the world isn’t going to help.  That’s was Qwest and other smart companies have figured out.