08-The Right Way to Manage Unprofitable Customers (1)

7/31/2019 08-The Right Way to Manage Unprofitable Customers (1)

1/4

- 1 -

The Right Way to Manage Unprofitable

CustomersKey ideas from the Harvard Business Review article By Vikas Mittal,Matthew Sarkees, Feisal Murshed

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 profitablecustomers 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?
http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/index.jsp?cm_mmc=hbd-_-syndication-_-bnet-_-articlehttp://www.bnet.com/2439-13502_23-197382.htmlhttp://www.bnet.com/2439-13502_23-197382.html


2/4

- 2 -

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.

Purchase the full-length Harvard Business Review article here.

Visit Harvard Business Online.

See more on Strategy and Execution at Harvard Business Online.
http://harvardbusinessonline.hbsp.harvard.edu/hbsp/index.jsp?cm_mmc=hbd-_-syndication-_-bnet-_-articlehttp://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=R0804F&referral=2659&cm_mmc=hbd-_-syndication-_-bnet-_-articlehttp://harvardbusinessonline.hbsp.harvard.edu/hbsp/resource_centers/business_strategy.jsp?N=513901&cm_mmc=hbd-_-syndication-_-bnet-_-articlehttp://harvardbusinessonline.hbsp.harvard.edu/hbsp/index.jsp?cm_mmc=hbd-_-syndication-_-bnet-_-articlehttp://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=R0804F&referral=2659&cm_mmc=hbd-_-syndication-_-bnet-_-article


3/4

- 3 -

Further Reading

Articles

The Mismanagement of Customer Loyalty

Harvard Business Review

July 2002

by Werner Reinartz and V. Kumar

When you're trying to identify unprofitable customers, don't look only at the obvious suspects--those

problem customers described by Mittal, Sarkees, and Murshed. Also analyze your "loyal" customers.

They may not be as profitable as you think. For example, loyal customers who know their value to

you may exploit that knowledge to get premium service and discounts. When the cost of serving

them rises and the prices you charge them decrease, they become unprofitable. For customers whoare very loyal but unprofitable, determine whether they have more money to spend. If so, offer them

products related to those they've already purchased.

Bottom-Feeding for Blockbuster Businesses


March 2003

by David Rosenblum, Doug Tomlinson, and Larry Scott

Before you show the door to supposedly problematic customers, consider the "bottom feeder"strategy described in this article. Bottom feeders assess the needs of customers that other companies

are shunning, and then develop a business model to turn a profit by fulfilling those needs. Consider

Paychex, a payroll-processing company that used this strategy to good effect. Paychex built a nearly

billion-dollar business by serving small companies. Established players had ignored these customers

on the assumption that small companies couldn't afford the service. Paychex now serves 390,000

U.S. customers, each employing an average of around 14 people.

The Flaw in Customer Lifetime Value


December 2007

by Detlef Schoder

Don't fear acquiring customers who could turn out to be unprofitable. Just know exactly when to divest

them. How? Factor options analysis into your calculations of customers' net present value (and thus

customer lifetime value). For example, suppose a customer costs $100 to acquire and $100 to retain

for five subsequent periods--totaling $500 to keep him. If you expect him to purchase $150 of goods

in the first period, $100 the next, $50 the next, and $0 in the final two periods, he'd look unprofitable
http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=F0712J&referral=2340http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=R0303C&referral=2340http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=R0207F&referral=2340


4/4

- 4 -

(generating just $300 of revenue at a marketing cost of $500). But drop him after the second period,

and he looks profitable: Over the five periods, marketing cost is only $200 ($500 minus $300 you've

saved by dropping him), but his revenues are $250.

About the AuthorsVikas Mittal is the J. Hugh Liedtke Professor of Management and Marketing at Rice University's

Jones Graduate School of Management in Houston.

Matthew Sarkees is an assistant professor of marketing at Penn State University's Great Valley

School of Graduate Professional Studies in Malvern, Pennsylvania.

Feisal Murshed is an assistant professor of marketing and e-business at Towson University's

College of Business and Economics in Towson, Maryland.

Copyright 2007 CNET Networks, Inc. All Rights Reserved.

08-The Right Way to Manage Unprofitable Customers (1)

Documents

Transcript of 08-The Right Way to Manage Unprofitable Customers (1)