Managing Unprofitable Customers

by | Nov 23, 2014 | Customer Service

It can be said in no uncertain terms that customers are vital to any business. There is no doubt also that dealing with customer demands and wants is tough and challenging but companies manage it since it is a given. However, there are some customers that are literally a ‘waste of time and resources’ since dealing with them costs companies more than the business they provide. Of course, companies don’t intentionally ‘enroll’ unprofitable customers, but very often it does happen and companies seem stuck with them.

Unprofitable customers are the ones who never stop demanding and putting forward requests despite the quality of service and competitive pricing they receive. They always and continually demand more and if companies were to give in to a request or two, they expect even more. What’s worse is that they are consistently thinking of ways to demand more – your time, your resources – making them quite overwhelming and unendurable. They quickly become money wasting ‘tasks’ rather than the profitable prospects they should be. Managing unprofitable customers then becomes extremely important and urgent. Most often this change is slow and not easily detectable but gets way out of control leaving little time for companies to realize the gravity of the situation.

Could you answer immediately, how many unprofitable customers you have? Um..2, 3 – you probably don’t know. Herein lies the problem – your company is probably profitable and hence you are not ‘distracted’ by the unprofitable customers. The fact you should be affected – undertake a due diligence for your company’s customers. You will probably be shocked by the high percentage of unprofitable customers that could be resulting in a loss to your company’s bottom-line and stunting the growth of your company. These ‘sponges’ or unprofitable customers are sponging off more resources of your company than they actually pay for or are worth. They make serious dents in the company’s ability to deal better with profitable customers and your company seems to be constantly dealing with rifts between the management and the sales teams, without even knowing why.

Unprofitable customers come in different ‘varieties’ – some don’t pay their bills, some are so high on maintenance that the cost of keeping them is actually eating in to your profits and yet others seem to be hanging around for the ‘freebies and discounts’ without high impact purchases. The straightforward answer to such unprofitable customers is – weed them out, point them to the door, sever ties – however, you put it, the fact is they must be taken out of your ‘system’. Companies must remember however, to be cautious while ‘weeding’ out these unprofitable customers so as to avoid other incidental damages. This could be in the form of your profitable customers wondering what happened and whether they would be shown the door next and could move out to other companies to avoid this embarrassment. Your competition would gain from this windfall and unfortunately for you potential customers may also defect before they actually come your way.

To protect your company from such damage and to protect your reputation, it is vital that companies don’t chop off these unprofitable customers as soon as they start becoming so. Try providing information on the use of your product, have your customer service representatives talk with them to understand the exact nature of their ‘problems’. If nothing helps then removing them should be resorted to but must be done with respect and by communicating this decision to them face to face. It is possible that while trying to understand the reason for a customer turning unprofitable, you might discover ways to change them back to be profitable and also avoid any of those potential damages that were mentioned earlier. Some dos and don’ts may help companies to better offload unprofitable customers.

Don’ts:

– Do not let emotion drive you instead use data to understand your unprofitable customer. It is possible that the customer has been with your company for long and so the idea of disinvestment may seem appalling. However, use data to understand for how long they were profitable and the length of time they have been unprofitable.

– Do not just raise your product prices as a standard across just to make up for the losses incurred due to the unprofitable customers. The hike could be viewed as unjustified by your good customers and they may end up leaving you. Word of such an ‘impromptu and unjustified’ hike would spread denting your company’s reputation and also keeping away a large number of potential customers.

– Remember to not obscure the line between top line earnings and bottom-line profit. It is vital to understand whether the large revenue sums will ultimately account for profitability thereby contributing to the bottom-line which is volume driven by profit. Make a thorough analysis to understand this balance.

Dos:

– Raise your prices for both unprofitable and profitable customers. However, for profitable customers ensure that the price raise is not to absorb the losses incurred due to the unprofitable ones.

– Ensure that you know why your once profitable customers are unprofitable now. It is possible that they are unaware of the range of services your company provides. Educating these unprofitable customers on such services or other products could lead them back to being profitable.

– Make an analysis of which customers take more time to service and which take less time. It is possible that your company is over-servicing unprofitable customers through a portion of your company that has high overheads. Servicing them with a portion that has fewer overheads could put the customer back to being profitable. Also you may cut down on certain expenses by understanding that calling a customer every month may not be required – once every quarter or once in two months would suffice too. Over-servicing could be costing your company unnecessary expenses.

– Point these unprofitable customers towards competition. This way they don’t feel they are being ‘let off’ and your company benefits by eliminating them from the system.

– Before implementing any major changes, check with a small group of trusted customers and get their reaction. If the major portion of the responses is positive, then you can safely implement changes. The unprofitable customers will probably defect on their own as the changes would not be as attractive to them.

What needs to be borne in mind is that these approaches could be used in conjunction with each other allowing for greater success in eliminating the unprofitable customers. Also it is possible that a customer may be unprofitable in terms of direct revenue generation but could be great influencers having large number of ‘followers’ on social media sites. Keeping such highly influential people in your customer base would benefit your company’s reputation and help to gain market leadership through their influence. They would provide the necessary leverage required to acquire more customers are much lesser costs and effort. Use these ‘unprofitable’ influencers to make you profitable through other routes.

Whatever the action your company decides to take, ensure that you test the impact of your decisions. It is possible that a certain line of products are actually unprofitable and rather than getting rid of the customer who you feel is unprofitable, look at your own products first. Removing or tweaking the product line could be the ‘kick’ your profits need and also change the unprofitable customer to a profitable one. A strategic and well-thought out approach would help maximize your profits. Chopping off ‘unprofitable customers’ is a tricky proposition ideally should be the last resort and done once only after all other unprofitable avenues have been analyzed thoroughly.

For any business especially it is never a good idea to assume. In this case too assuming that you know instantly which customers are profitable and which are not could prove to be detrimental. A thorough analysis and examination of the cost being incurred on the customer, the revenue and the bottom-line impact the customer has and other such details will help to make the segmentation of good and bad customers easier. Only after this analysis can your company know that unnecessary baggage and needless expenses are being eliminated and free up these resources to service the profitable customers better and also attract potential customers.

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