Earlier this year in February, I wrote about Blockbuster vs. Netflix. The main word-of-mouth lesson learned in that post was one of “bad profits“. Netflix simply took Blockbuster’s negative word-of-mouth regarding late fees and modeled their entire business model and ad campaign around it – “the end of late fees”. It worked, and Netflix took off like a rocket. As I wrote in February, Netflix was worth twice what Blockbuster was at the time. That situation hasn’t changed – Netflix is worth $2 billion today while Blockbuster is worth $1 billion (they are both trading higher due to the more robust stock market we are in). “Bad profits” create an opportunity for entrepreneurs or established companies to come along with a competing service that is highly disruptive.

Speaking of bad profits, I was especially intrigued this morning to read about my friends at 1-800-FREE-411 (Jingle Networks). TechCrunch reports that 1-800-FREE-411 has already received 100 million 411 calls! It has taken over 3% of the $8 billion 411 market. I know the CEO of this company (he founded Flycast with a fellow Wharton MBA graduate from my class), as well as their early investor Josh Kopelman, who is also an investor in Bazaarvoice and the founder of Half.com. I consider these two some of the smartest people I am fortunate enough to know. This is another stunning example of bad profits creating an incredibly huge and disruptive market opportunity. 1-800-FREE-411 has the easiest marketing slogan I have seen in a long time – everything you need to know is right there in the phone number. To learn more about what created this opportunity, check out Josh Kopelman’s great blog post.

There are so many recent examples of bad profits in action. Think of the incredibly disruptive Skype, which yesterday had over 8 million users online. The negative word-of-mouth from exorbitant long distance fees paved the way for Skype’s success. And, of course, everyone knows by now that eBay bought them for $2.6 billion.

Where are the bad profits in your industry and how can you capitalize on them?

Do you have any bad profits yourself? One example I can think of in retail is the difficulty of returns when you have a bad experience with a product. Costco capitalizes on that by providing unlimited returns on all items (i.e. buy a TV, save the receipt, and you can literally return it 2 years later if it breaks). Their only exception is for computers – there is a 6-month policy on those. I have been tracking Costco’s success for years to see if this incredibly customer-friendly policy would hurt them. Quite to the contrary, Costco has thrived as a result. I encourage you to read my friend Gary Stein’s blog for more analysis on Costco.

If you are a Bazaarvoice client, we suggest you measure your word-of-mouth promoters and detractors with our Net Promoter service. We haven’t promoted it as well as we should (we’ll change that), but it is truly powerful and will illuminate any potential sources of “bad profits” and word-of-mouth detractors.

And now enjoy the free 411 calls!