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The Right Way to Manage Unprofitable Customers
Key ideas from the Harvard Business Review article by Vikas Mittal, Matthew Sarkees, Feisal Murshed
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The Idea in Brief
Some of your customers aren’t paying their bills. Others are so high-maintenance that the cost of serving them is eroding your profits. What to do? For many companies, the answer is simple: Show them the door.
Divesting difficult customers has its advantages, but consider the collateral damage: The profitable customers you’re keeping may wonder if they’re next in line and defect to friendlier providers. And you may do your competitors an unintended favor by sending new business their way.
To avoid these dangers, don’t dump customers the instant they become difficult, advise Mittal, Sarkees, and Murshed. Instead, use the authors’ five-step process to try to restore customers’ profitability. For example, customers who constantly complain may simply need information on how to use your offerings correctly. Use divestment only as a last resort. And do it respectfully, by notifying customers in person.
Apply this process, and you restore more customers to profitability while mitigating the damage of any unavoidable divestments.
The Idea in Practice
The authors recommend this five-step process for managing problem customers:
1. Reassess the Relationship
Determine why the customer has become a “problem.” Consider your company’s overall relationship with the customer, not just profitability. For instance:
· Is a customer who’s unwilling to spend (and therefore “unprofitable”) simply unaware of the range of services you offer?
· Have the customer’s needs changed?
· Has your company’s strategic focus changed, causing you to ignore (and offend) the customer?
2. Educate Customers
Provide information or training to help “problem” customers better understand and use your offerings. They’ll have fewer questions–and less need to constantly use your firm’s expensive resources.
Fidelity Investments identified low-margin customers who were frequently phoning service reps. Instead of divesting them, Fidelity taught them to use its other (lower-cost) troubleshooting options, such as automated phone lines and the company Web site.
3. Renegotiate Your Value Proposition
If education doesn’t improve things, consider pricing and service strategies that restore the balance between the costs of serving the customer and the benefits generated.
A supplier of commercial dyes for heavy machinery started charging extra for on-site service to some unprofitable clients as part of a renegotiated price structure. What could have been an obvious divestment situation became a win-win scenario for the company and its customers.
4. Migrate Customers
For still-unprofitable customers, consider moving them to a different distribution channel, a partner company better positioned to satisfy their needs, or a new form of payment.
Satellite TV service provider EchoStar Communications created a prepaid service option for customers with bad credit history, thus migrating them to a different form of payment.
5. Divest as a Last Resort
If there’s still no hope of continuing a relationship with a problem customer in ways that offer enough value for both sides–even after going through steps 1 through 4–it’s time to end the relationship. But do so in ways that mitigate any negative fallout for your company. For instance:
· With B2B clients, communicate your decision to divest months before a contract-renewal date comes up. Explain your reasoning in person, and help clients recognize that termination may be mutually beneficial.
· With B2C customers, provide advance notice in person or by a human voice rather than by an after-the-fact email message or letter. Also, focus your explanation on external factors (such as mounting competitive pressure to change your strategy) rather than simply a desire to increase profits.
Copyright 2008 Harvard Business School Publishing Corporation. All rights reserved