Many customers simply are not profitable. Letting them go is one option, but so is trying to train them out of expensive behavior.
In 2007, Sprint Nextel had a dilemma. Some of its customers contacted customer service on a regular basis. In the company’s opinion, they contacted customer service on too regular a basis. They became unprofitable to the company because of it.
Sprint’s decision essentially was to "fire" them as customers. The company sent these high-cost customers a letter that stated, in part: “The number of inquiries you have made to us during this time has led us to determine that we are unable to meet your current wireless needs. Therefore after careful consideration, the decision has been made to terminate your wireless service agreement.”
The Sprint example is one of several that authors Jiwoong Shin and K. Sudhir, both of Yale School of Management, examine in their article "Should You Punish or Reward Current Customers?" in the Fall 2013 issue of MIT Sloan Management Review. The article details the ways to determine which customers are most valuable.
Not surprisingly, Sprint's action created a wave of bad publicity for the company. But was it the wrong thing for Sprint to do?
“We recognize the mix of concerns, both ethical and practical, that swirl around firing customers,” write Shin and Sudhir. “Ethically, there may be issues about the fairness of focusing retention on the most profitable customers. Practically, there are a number of problems immediately associated with this tactic: negative opinions passed on to prospective customers, bad publicity, a social media firestorm and so forth. As a result, we advocate firing customers only as a last resort.”
There are, however, steps companies can take before making such a drastic move. Here are three suggestions from Shin and Sudhir’s article:
Reduce services to unprofitable customers. For example, the authors report that Royal Bank of Canada would prioritize and expedite a check trace for profitable customers in one day, while for unprofitable customers, it would conduct a less expensive three- to five-day trace.
Charge fees for costly services. This is a strategy, Shin and Sudhir write, “to rein in the undesirable behavior and convert the customer into a profitable one.” Some banks, for instance, now charge for paper statements while offering the less expensive e-statements for free.
Educate customers to use less costly service channels. Fidelity Investments did this, pushing customers to use its website instead of calling customer service reps. “If an explicit conversation can illustrate that both parties could save money with more economical behavior, then this is the easiest and best solution,” the authors observe. “For example, a customer who often cancels orders, requests expedited delivery or orders in very small batches can be extremely costly to the supplier. Highlighting how these types of customer behavior increase supplier costs and encouraging the customer to avoid such behavior can often lead to desired and profitable behavior.”
Shin and Sudhir note that one study found that, for business-to-business companies, the top 20% of customers are generally responsible for 150%–300% of total profits, while the company breaks even on the middle 70% of customers and has losses on the bottom 10%. Another multi-industry study by McKinsey & Co. found that bad customers can account for as much as 30%-40% of a typical company’s revenue. Bottom line: coming up with strategies for handling expensive customers is an issue for nearly every company.
For strategies on determining who your best customers are and ways to separate them from your other clients, read the full article.