Question

What is a qualitative advantage of keeping unprofitable customers?

Answer 1

S

print Nextel sent out letters to about 1,000 people on June 29, 2007, to inform them that they had been summarily dismissed—but the recipients were Sprint customers, not employees. For about a year, the wireless-service provider had been tracking the number and frequency of support calls made by a group of high-maintenance end users. As a Sprint spokeswoman told Reuters in July, “In some cases, they were calling customer care hundreds of times a month…on the same issues, even after we felt those issues had been resolved.” Ultimately, the company determined it could not meet the billing and service needs of this tiny subset of subscribers and, therefore, waived their termination fees and cut off their service.

Similarly, TXU, a large power provider in Texas, in 2005 implemented a tough-love marketing strategy in response to the competitive pressures of a deregulated energy market. It pulled the plug quickly on late-paying customers then charged them expensive reconnect fees, and it offered perks to those who paid on time. As a result, it reduced its “bad debt” from nonpaying customers and enjoyed productivity increases among employees who had previously spent a lot of time fielding calls from scofflaws. As one senior TXU financial executive told the Wall Street Journal, “A customer who calls you every day is less profitable than one who pays on time and never calls you.”

Customer divestment, whereby a company stops providing a product or service to an existing customer, was once considered an anomaly. However, it is fast becoming a viable strategic option for many organizations. Certainly, the skyrocketing costs of acquiring new customers and the complexities of cross-selling to different market segments continue to make customer retention imperative. But some firms are taking advantage of new segmentation approaches and technologies that have made it easier to focus on retaining the right customers—those who will bring in the most revenue over time—and, by extension, to show problem customers the door.

To better understand recent trends in customer divestment, we took a closer look at some companies that have rid themselves of customers, as well as some of the customers they let go. We pored over news reports, press releases, and consumer blogs and magazines to explore the evolving customer-company dynamic. In 2005 and 2006, we interviewed 38 executives from 32 companies in a variety of industries, including IT, manufacturing, health care, finance, and professional services. We also surveyed a random sample of 236 customers. Of the executives, 90% said they had given serious thought to divesting customers, and 85% said they had already undertaken divestment. Of the customers, 23% indicated they had been let go by a company in the past year.

Our research identified four common reasons why businesses terminate relationships with end users: the declining profitability of specific customers, the lower productivity of employees as they deal with unprofitable customers, changes in the capacity to serve large volumes of customers, and shifts in a company’s business strategy. While most of the managers we interviewed had thought about divesting customers for one of these reasons, none wanted to acknowledge that publicly. Setting aside the immediate effects of such a strategy on profits and operations, the managers we spoke with worried about longer-term ramifications such as retaliation by clients or earning a reputation as a “difficult” service provider or an industry rebel. Indeed, the collateral damage of divestment can be high: You may do your competitors an unintended favor by sending new business their way. You can damage relationships with the high-value customers you retain, who may come to perceive your company as being service-unfriendly. You may even violate ethical or legal obligations to customers.

Before making any moves to divest, businesses would do well to walk themselves and their B2B or B2C customers through a five-part framework we’ve developed from our research. It will help executives consider the strategic impact of customer divestment beyond just profitability. The model offers a system for objectively assessing the present and potential value of each customer or cohort—in short, for putting each customer relationship in context and deciding on the best course of action. (See the exhibit “The Customer Divestment Continuum.”) After you have done the hard work of reassessing your present relationships with customers, educating unprofitable customers, renegotiating the value proposition, or migrating customers to other partners or providers, you will be able to more clearly evaluate the importance of such customers to the company’s long-term success. Then—and only then—should you begin terminating relationships.