Should we treat unprofitable customers as well as profitable ones?
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.
- Rohit Deshpande on Building a Market-Orientation
- Reinartz & Kumar on The Influence of Customer Relationship Characteristics on Profitable Lifetime Duration
- Homburg et al on Managing Dynamics in a Customer Portfolio
- Robert Simon on Choosing the Right Customer
- McKinsey on The Proliferation Challenge
- Graham Hill on Sprint Fires its Unprofitable Customers
- Grandey et al on The Customer is Not Always Right: Customer Aggression and Emotion Regulation of Service Employees
- Alexander Kjerulf on Top Five Reasons Why “The Customer is Always Right” is Wrong