Gaming the system using customer complaints
A company that specialized in motivation and life skill training had had over 15,000 student / customers since it was founded many years ago. The program averaged about one or two refunds per year, and no civil complaints to the state Attorney General’s office. In 2005 they noticed an abrupt upswing in refund requests, and over 80 complaints were sent to the Attorney General’s office in their state. The business model had not changed, and the same people were running the business the same way they always had. They were at a loss to describe what was happening.
Having misunderstood what was actually happening, they approached (with counsel) the AG office and quite rightly voiced the opinion that 80 complaints from 15,000 students/ customers was not an unreasonable amount, just over one half of one percent. While this seemed reasonable from a statistical perspective, the AG’s office decided to pursue the claims. Their attorney suggested that they just refund the money, so they did. Inexplicably, this seemed to accelerate the number of refund requests, rather than solving the problem, as if they were adding gasoline to a fire.
One afternoon a senior manager for the company’s IT group was running the normal searches on the Internet to make sure that the money they were spending on certain search terms was in fact in place. What he found was a “paid for” advertisement on Google that came up when you searched for the name of his company. The ad very clearly bad-mouthed the company, and gave specific instruction on how to demand a refund, and how to file a complaint with that state’s AG’s office.
The first thought was to look for the location of the advertiser, but they were well camouflaged. The second was to call Google to see what the heck they were doing allowing something like that to occur. They got it right with Google, and learned that the ads were being paid for by one of the company’s competitors in another county.
Back at the AG’s office, even the new fledging attorney handling the case wondered why all of the complaints looked the same. Nonetheless, it was an easy win, so he moved forward toward an enforcement action. In the end the client paid both the AG’s office a fine and the actually-satisfied-with-the-program customers their refunds. This added up to several hundreds of thousands of dollars.
So let’s recap what happened. A cunning competitor purchased an adword (a word or phrase that would point to your Web site in a search), designed to show up each time the victim company’s name was searched, that told how to get refunds from the company and file complaints with an AG’s office. The AG took the bait, and even knowing something was wrong, effectively enacted a state-sponsored class action suit against the company.
When asked what would have happened if the company were not based in his county, the AG said there would have been nothing his office could have done. Being no fools, the victim company let go over 200 employees, and moved its headquarters offshore.
This story is an interesting illustration of a competitive strategy: gaming the system, and the system responding mindlessly. The competitor won a small victory. The AG won a hollow victory. Two hundred jobs left the US in one week, not because of raw economics, but to avoid economic victimization by the state.
