Should we treat unprofitable customers as well as profitable ones?

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Companies have a moral duty to support their front-line staff by giving them permission to refuse to serve customers who step over the line, argues Graham Hill. 

Hardly a day goes by without another flood of motherhood and apple pie articles extolling the importance of ‘putting customers first’, about how the ‘customer is king’ and other such ridiculous simplifications. Adopting a so-called ‘customer-focus’ has become a mindless mantra for the new breed of copycat managers and the hordes of self-serving consultants peddling their latest customer-focus snake-oil.

If only life were so simple!

Customer-focus as a one-size-fits-all proposition is fundamentally flawed. As the Marketing Science Institute showed in their extensive research into building a market-orientation in the 90s, simply adopting a customer-focus is significantly less profitable than adopting a more rounded market-orientation.

There is more to business than just customers. Reinartz & Kumar showed in their research on The Influence of Customer Relationship Characteristics on Profitable Lifetime Duration that different types of customers have different profitability.

All customers are not created equal. Homburg et al took this a step further in their research on Managing Dynamics in a Customer Portfolio where they showed that how customers are treated should change dynamically as their behaviour and profitability changes. Different customers should obviously be treated very differently.

CRM is all about managing customers for optimum profitability

To make things simple, I want to think about how we should treat three different types of customers: profitable customers you can serve well, unprofitable customers you can’t serve well and a largely ignored type, bad customers that nobody deserves.

As Peppers & Rogers imply in their excellent to-the-point description of CRM (= treating different customers differently), each requires a different approach to maximise their profitability, or indeed, to minimise their unprofitability.

The good: Profitable customers you can serve well

Every company needs profitable customers. Although it varies from industry to industry, approximately 20% of the most profitable customers typically provide 80% of most companies’ profits. What not every manager realises is that although profitability can be influenced in the short-term by increasing prices or reducing costs, in the longer-term it is driven by serving good customers better than competitors.

Although it varies from industry to industry, approximately 20% of the most profitable customers typically provide 80% of most companies’ profits.

Not all customers though; just those whose needs are most closely matched by the service the company can provide profitably. As Robert Simons describes in an article on Choosing the Right Customer, companies should identify their best customers and organise themselves around providing these customers with service.

The bad: Unprofitable customers you can't serve well

Unfortunately, along with the highly profitable customers most companies have unprofitable customers as well. Although there are many reasons why a customer might be unprofitable, it often comes down to a basic mismatch between their needs and the service the company can provide profitably.

And the problem of unprofitable customers is getting worse. As McKinsey describes in an article on The Proliferation Challenge, the explosion in different types of customers, products and channels has increased complexity, reduced satisfaction and reduced profitability. Although a company can deal with unprofitable customers like US telco Sprint did in 2007 by theatrically firing them, there are better and less risky ways to deal with them.

And the ugly: Awful customers nobody deserves

As if unprofitable customers weren’t bad enough, there is worse to come. As anyone who has worked on the front-line with customers will tell you, there is a certain type of customer you can never satisfy, no matter what you do. And within these already difficult customers there is a further subset that become rude and abusive when they don’t get exactly what they want.

Nobody should have to accept these bad customers; they are bad for staff, they are bad for other customers, and they are bad for business. Companies have a moral duty to support their front-line staff by giving them permission to refuse to serve customers who step over the line. This is an inconvenient truth for many of those who would have us believe ‘the customer is always right’. The truth is that being a customer brings a mixed bag of rights and responsibilities with it.

It is simply wrong to take advantage of the rights and not expect to have to bear the matching responsibilities. Nobody should accept bad customers like these, no matter who much revenue they bring in. They should be shown the door and banished until they behave themselves.

Must we accept the tyranny of bad customers? Should we treat unprofitable customers as well as profitable ones? Or should we start to pick just those customers we can serve well and profitably, and abandon the rest to our competitors.

What do you think? Post a comment and get the conversation going.

Graham Hill is a partner at Optima Partners.

Further reading:

About Graham Hill

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16th Jul 2014 13:46

Roy Atkinson from The Think Zone, a customer service blog responded to my post as follows...

Quote

"You’re comparing apple to oranges, Mr. Hill. Adopting customer focus is not a simplification, nor is it “motherhood and apple pie.”

It is a change in the *focus* of the way the business designs and delivers its products or services. It doesn’t necessarily mean less profit. It doesn’t necessarily mean that there isn’t research into market dynamics. It doesn’t necessarily mean that people aren’t creating customer personae, or that they are attempting to build “one-size-fits-all” models.

It does mean that they are attempting to look at the business from the customers’ perspective and deliver the kinds of products and services the customer needs or wants in the way the customer is most likely to buy them–and come back again and again. It does mean that these customer focused businesses pay attention to the details that they themselves often might miss, but that their customers will recognize instantly.

Customer focus seems to get dismissed again and again, and yet businesses that have this focus have survived and thrived through all kinds of economic upheaval.

Might there be some customer focus advocates who over simplify and who might “give away the farm” while ignoring the bottom line? Yes. But I can also name a litany of businesses which no longer exist because they ignored customers.

Sweeping generalities don’t work from either point of view."

Unquote.

Is Roy right when he says that "customer focus is not a simplification, or motherhood and apple pie”?

​Is he right when he says customer-focused companies "have survived and thrived through all kinds of economic upheaval"?

Or are these just "sweeping generalities (that) don’t work from either point of view"?

What do you think? Post a comment and get the conversation going.

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16th Jul 2014 17:29

I have worked in several call centers and rude customers come with the territory. But not all rude customers are bad customers and not all bad customers are rude customers. Some of our most profitable customers are those that can be un pleasant. We just have to take it on the chin after all how would they respond if we told them to be nicer? They would take their business elsewhere. 

Most people are not rude all the time. They have a bad day and can be cruel. If we stopped serving every customer every time they were rude on the phone we would soon be left with not many customers! Businesses benefit from tolerance. 

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19th Jul 2014 12:46

Roy makes an interesting comment.

I agree with some of what he writes, but not with all of it.

It is quite literally a trivial exercise to find dozens of motherhood and apple pie posts extolling the importance of putting customers first, about how the customer is king and other such ridiculous simplifications.

I am a big fan of developing a detailed understanding of customers, their behavior and their aspirations. Informed by Vargo & Lusch’s work on service-dominant logic I approach this work from a value co-creation perspective. I look at all the players in the customer ecosystem, at what they value and how resources flow between the different actors. I look at the jobs customers are trying to do, the decision journeys they go through to do them and the interactions with other actors where value for the customer is created or destroyed. I use the insights from these to innovate better interactions where customers get more of what they want (and where other actors get more of what they want too). And to make difficult choices about those which customers I must let go because I cannot satisfy them or because I can’t make enough profit from them. As McKinsey research shows, no company should try to be all things, to all customers, all of the time. This is not the same as having a customer-focus.

The problem with any company having a customer-focus is - as the MSI Market-Orientation research programme showed - it invariably stops them from considering other factors with an equal weighting. If customers come first, then someone or something else must come second. In reality, customers are but one input into the strategic direction equation, along with internal capabilities, collaboration with partners, competitor activities, technology trends and financial market expectations, to name but a few. Success requires that a company considers all of these factors when making complex trade-offs about what business it is in and how to go about being successful in it. A customer-focus by itself is simply not enough to be successful in today’s hyper-competitive markets.

Roy says that “businesses that have a customer-focus have survived and thrived through all kinds of economic upheaval”, yet he provides no examples nor any other evidence to support his case. The evidence from the MSI’s Market-Orientation research programme strongly suggests otherwise.

We wouldn't want to get sucked into another of those ‘sweeping generalities’ now would we.

Dr. Graham Hill

@grahamhill

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19th Jul 2014 13:08

Hi Tibor

I have never worked in a call centre, but mw wife used to run one for Ford Motor Company in Germany. I remember being regaled by tales about the good, the bad and the awful customers that would call in.

My wife had a cast iron policy that no call centre staffer should be forced to put up with rude or abusive customers. If customers were rude or abusive, they would be politely informed by the staffer that if they continued, the staffer would put the phone down and capture the reason why in their notes. The customer would be invited to call back when they were more calm and collected.  The rule worked wonders. Staffers knew that they were valued and had management’s support when faced with rude and abusive customers. Staff sickness and absenteeism fell through the floor. And customers quickly learned that they had no automatic right to be served if they were rude and abusive. The incidence of rude and abusive calls quickly fell, particularly when the policy was published in the customers’ Vehicle Service Manual.

If your call centre management allows customers to be rude and abusive towards you and other staffers they are sending out a very simple message; that you are not valued as an employee and that you are expendable. My advice to you is equally simple; move to a call centre that values you as an employee and that supports you in serving customers. Call centres get the customers they deserve. All it takes is smart management to realize that.

Business does benefit from tolerance. But tolerance should not include accepting rude and abusive customers.

Graham Hill

@grahamhill

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21st Jul 2014 10:23

Gregory Yankelovich posted an interesting comment…

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“It may not be politically correct or culturally easy to accept, but no company can deliver a top quality experience to any customer – only to those it is best focused to serve. That means it is better for such company’s culture, it’s target customers, and the consumers at large to clearly communicate what type of customers it will not serve, because it cannot deliver the quality of experience they deserve. The best example I know is USAA that leads every chart as the top customer experience provider, but will not take your business if you are not a member of the military family.”

Unquote

I agree with him. If any company is to do well it must understand which customers it can serve profitably and which customers it can serve well. Serving customers profitably allows the company to prosper, whilst serving customers well ensures that they will prosper into the future. Ted Levitt described it so well back in 1960 in his seminal article on Marketing Myopia when he talked about a simple three step process: 1. Understand what customers want, 2. Work out how to give it to them profitably, then 3. Tell them all about it. In my experience, too many companies try to be all things to all men and end up serving none of them particularly well.

Graham Hill


@grahamhill

Further Reading:

Ted Levitt, Marketing Myopia


To be successful a company has to focus on customers. Just not on every potential customer.

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21st Jul 2014 10:26

Bob Thompson from CustomerThink.com posted a long and interesting comment…

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“Graham,

it’s fortunate indeed that few companies are managed by soundbite… be it “customer first” or “employee first” or even “managing customers for optimum profitability.”

If a company were to literally put the customer first in every decision, it would soon go out of business. Even a customer-friendly company like Southwest draws the line at employee abuse. And it doesn’t give seat assignments because it would undermine a main loyalty driver: low fares.

That said, since you’re making your own sweeping generalization, I’ll make one of my own: the CRM “big idea” of treating customers like assets and a source only of profits does not exactly build genuine relationships. It’s part of the answer, because targeting the right customers to maximize company value is important, but doesn’t really answer the “what’s in it for me?” question that customers have.

I’m confused about this statement “any company having a customer-focus is – as the MSI Market-Orientation research programme showed – it invariably stops them from considering other factors with an equal weighting.”

Really? According to the abstract at http://www.sagepub.com/booksProdDesc.nav?prodId=Book9297:

“Market orientation is best defined as an organization-level culture, a set of shared values and beliefs about putting the customer first in business planning. This book demonstrates the importance of market orientation on organizational culture (the shared set of values for putting customers first), on strategy (the creation of superior value for a firm’s customers), and on tactics (the set of cross-functional activities directed at creating and satisfying customers). An illustrious group of authors under the leadership of MSI Executive Director Rohit Deshpandé, (Harvard Business School), has collaborated on this unique and timely book. The wisdom of Developing a Market Orientation should be experienced by all business leaders, scholars, and students.”

This suggests that “putting customers first” is central to a market orientation, doesn’t it?”

Unquote

Naturally I agree with Bob about not putting customers automatically first in all decisions. It is a trivial exercise to show that is far from the optimum operating model for any company.

Southwest Airlines is an unusual choice of example. Although it was the first low cost carrier in operation, it is no longer the leading example. Most of the other low cost carriers have moved away from first-to-board seating assignment towards selecting your seat as a source of ancillary revenue. Even ultra low cost carrier Ryanair - which has 10% lower costs than Southwest Airlines - offers seating as a paid ancillary. Most of the other low cost carriers do too.

Bob’s point about what’s in it for me is an interesting one. The evidence suggests that although companies are not good at creating true relationships with customers, that’s OK, because customers don’t want one anyway. They want good products, at keen prices and help when things get a bit tricky. It is the tricky phase that is important. The evidence suggests that customers want relational support during this phase, whether it be in selecting the right product, getting it working, or in particular, in getting more value out of it during a long lifetime of use. Relational support is not the same as having a true relationship. Unfortunately, the goods-dominant mentality of most companies focuses only on the bits up to the point of sale of the product - at which point the company has the customer’s money - and largely ignores the customer afterwards. There is little wonder that customers bemoan the perception that there is little in it for them. 

The MSI market-orientation research programme stretched over almost a decade of research by leading researchers in the field, such as Stanley Slater, John Narver, Bernard Jaworski and Ajay Kohli. The book abstract you quoted is a little at odds with much of its content. It is an attractive marketing blurb designed to sell what is a rather complicated marketing science book, rather than a detailed exposition of the market-orientation construct. If you look inside the book at the underlying research you will see that a market-orientation covers a number of different capabilities, including:

1. Understanding customers, their needs and how to satisfy them

2. Knowing what competitors are doing and responding accordingly

3. Coordinating resource sharing across the organization and its partners

4. Focusing on quarterly profits and positive margins in the longer-term, and

5. Emphasising that all aspects of the business needing to be profitable.

The explicit message is that all five levers need to be pulled in unison for an organization to become market-oriented (and in doing so to satisfy customers profitably). And the research shows that doing so delivers superior performance than just pulling the customer lever, or just pulling any lever come to that. Of course, that doesn’t mean that the customer lever doesn’t need to be pulled at all, far from it. Just that it is one of a number of levers to be pulled together.

Customers are critical to business success. Without them no company has a viable business. But they are not the only thing that drives success. Successful companies recognise that they have to pull the customer lever and all the levers together to be successful. A customer-focus by itself is not enough to be successful

Graham Hill

@grahamhill

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22nd Jul 2014 15:33

Bob Thompson at CustomerThink.com came back with another interesting comment…

Quote

“Graham, you are choosing to distort “customer focus” into “customer only.” I’ve yet to run into a company that uses expressions like customer focus/centric/driven (take your pick) to mean “we only do what the customer wants, and that’s it!”

The survey instrument used by Despande clearly shows the emphasis on customers: understanding, delivering and assessing what customers value:

Our business objectives are driven primarily by customer satisfaction.
We constantly monitor our level of commitment and orientation to serving customer needs.
We freely communicate information about our successful and unsuccessful customer experiences across all business functions.
Our strategy for competitive advantage is based on our understanding of customers’ needs.
We measure customer satisfaction systematically and frequently.
We have routine or regular measures of customer service.
We are more customer focused than our competitors.
I believe this business exists primarily to serve customers.
We poll end user’s at least once a year to assess the quality of our products and services.
Data on customer satisfaction are disseminated at all levels in this business unit on a regular basis.

The word “customer” is included in 9 out of the 10 questions. And one where it isn’t “end user” is used instead.

Of course there is more to being customer centric than just complying with every customer request. Everyone knows that. Like I said, sound bites aren’t good for running businesses.”

Unquote

I agree with Bob. Up to a point.

I intentionally used the expression ‘customer-focus’ to point out that many pundits do write motherhood and apple pie articles extolling the virtues of an obsessive focus on customers, at the expense of staff, partners and shareholders. The original article was a call to action for companies to focus on their good customers, to work out what to do about their bad customers and to tell their ugly customers to stay away.

I assume Bob is referring to the MORTN scale developed by Deshpande & Farley in 1998 (see http://bit.ly/1ubtnkn for more details).  Unfortunately, this scale only considers the customer-orientation part of market orientation and has been roundly criticized as a result. There are two standard surveys that are most commonly used to measure market-orientation: the MKTOR scale created by Narver & Slater in 1990 (see http://bit.ly/1o58cMr for more details) and the MARKOR scale created by Kaworski, Kohli & Kumar in 1993 (see http://bit.ly/1p6e6JD for more details). Like the definition of a market-orientation, both scales look at a range of other factors in addition to an organization’s customer-orientation. Although both have their faults, nobody today seriously challenges the idea that a market orientation is much more than just a customer-orientation.

None of this detracts from my original suggestion that the heart of CRM is treating different customers - the good, the bad and the ugly - very differently. And that success requires organisations look beyond even their best customers; at how they organize themselves internally and at how they can compete against their toughest competitors.

Graham Hill

@grahamhill

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24th Apr 2018 11:25

Comment posted on the MyCustomer LinkedIn group by member Helen Green:

"a basic mismatch between their needs and the service the company can provide profitably" Something attracted that customer in the first place - Before looking to part from the customers, perhaps companies should first ask themselves why there is a mismatch - in particular whether the company was honest about what it was offering and whether it is delivering that offering to the best of its ability.

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28th Apr 2018 17:22

Graham - thought provoking article as I would expect. I think the word "treat" in your title is a important one and I believe more precision in its meaning is required in order to answer the question. It is more than semantics.

If you mean "behave towards" then I think the answer is "definitely yes". You should always behave consistently towards everyone and not just customers. Most organisations have a set of aspirational values (as apposed to the actual values - the two are sadly really the same) that are likely to include transparency, trust, honesty, supportive, etc etc. If they are to have any currency then they need to be lived through every transaction and relationship and indeed every pore of the organisation.

I imagine you and I will certainly have been treated appallingly by the procurement department of many a large corporation - that same corporation that espouses "obsession with customer service" or some other dreadful cliche. If customer service is simply a spray on tactic then it lacks authenticity and in the medium to long term will add no value. You have to behave consistently with your (aspirational) values otherwise the real values should include "treat suppliers, staff etc as secondary".

However, if by "treat" you are referring to priority of action or service then I am very happy for the answer to your question to be "no". You should definitely prioritise customers based on current and future profitability and other factors such as how they respect and deal with your staff.

Over my time as a consultant I have had clients who try to beat me up on price. My response I hope has been in line with my and my organisation's values - honest and open, giving feedback etc. My typical response has been that if you are only prepared to pay £X when other clients pay £2X then you will not receive the same responsiveness and if there is a constraint over resources then you will be further down the queue. I think that leads to treating all customers the same but prioritising the better ones.

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