Firing Customers: Think Before You Shoot
Original Post: 11/18/2002
Difficult times have seen many companies searching for ways to increase their profitability quickly without making any investments in their customers first. Sadly, many are adopting poorly thought through approaches that look attractive in the short-term, but that may well destroy value in the longer-term.
The increasing emphasis on simply “firing unprofitable customers” is one of those approaches. It may make perfect sense to the management accountants, but it is often a symptom of a deeper malaise within the company. Customers themselves aren’t unprofitable, it is the company that has let its business fundamentals get out of control that is. And the knee jerk response of firing customers won’t help the company put the fundamentals right, it just hides the problem until the next phase of even more competition comes along.
There are many things the company should look at doing before it adopts this rather drastic, no-return solution. The first of these is to understand where, how and why the costs (that make the company unprofitable) arise, where, how and why the revenues (that make the customer profitable) arise, and what the business risks associated with both are. Some of these costs will arise from the interaction with the customer, but many will arise due to internal inefficiencies in the way the company’s business runs, or through excessive overhead costs.
Once the costs are known, the company can attempt to reduce them in the areas with the least detrimental impact on value delivered to the customer. There are a number of ways this can be done, for example, through process reengineering, through reducing service levels (although care must be taken here not to reduce levels below that which is an acceptable minimum for customers), or through getting the customer to do more of the work themselves through customer self-service. The general move to customer self-service and beyond that, to Customer Managed Relationships (CMR) not only reduces costs, but has been shown to increase customer satisfaction, and customer-driven cross and up-selling.
The second thing that the company can do once they understand their costs is to use lower-cost partners to deliver costly interactions or costly internal processes. Many companies are already doing this, through a variety of partnering, in-sourcing and out-sourcing deals. For example, customer interactions are often outsourced to external call centres, internal processes to specialist external agencies, and financial risk can sometimes be securitised against future customer revenues.
If these cost reduction approaches are not appropriate for the company, the third thing the company can do is increase revenues by passing the costs on to the customer, to reflect the true cost of doing business. This can be surprisingly effective if done well. It can also cross-sell and up-sell other products to share the internal overhead costs. This can be done with the company’s own products, or through the cross-selling of partner companies` products. For example, airlines whose frequent flyers use a partner hotel or car rental service collect a premium from the partner for the FFP customer (revenue) they passed their way.
If all else fails, you can always encourage customers to use the services of other companies, either directly by recommending them, or through reducing service levels until they defect. This is a difficult area but is much better than just sending them the equivalent of a “Dear John” letter. But before the company does this, it must be sure not only that the longer-term revenue stream lost from departing customers isn’t going to make a big dent in future cash-flows, but also that the departing customers don’t make the remaining customers unprofitable once internal overhead costs are shared out.
So there you have it, the company has understood its fundamentals and has made an informed decision what to do. It has reduced its costs, improved its revenues and only lost a few customers where it really cannot make a profit. The company is now much better placed to compete in the future than it would have been by just firing its unprofitable customers. The downside is that it has had to ask itself some tough questions and to think hard, and it hasn’t been able to respond overnight to the problem. I know which sort of company most financial analysts and shareholders would prefer to invest in. And I’m sure you do too!