Vikas Mittal

Matthew Sarkees

Feisal Murshed

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">The Idea in Brief</h4>
 <div class="ideainbrief-contents">
  <p>Some of your customers aren’t paying their bills. Others are so high-maintenance that the cost of serving them is eroding your profits. What to do? For many companies, the answer is simple: Show them the door.</p>
  <p>Divesting difficult customers has its advantages, but consider the collateral damage: The profitable customers you’re keeping may wonder if they’re next in line and defect to friendlier providers. And you may do your competitors an unintended favor by sending new business their way.</p>
  <p>To avoid these dangers, don’t dump customers the instant they become difficult, advise Mittal, Sarkees, and Murshed. Instead, use the authors’ five-step process to try to restore customers’ profitability. For example, customers who constantly complain may simply need information on how to use your offerings correctly. Use divestment only as a last resort. And do it respectfully, by notifying customers in person.</p>
  <p>Apply this process, and you restore more customers to profitability while mitigating the damage of any unavoidable divestments.</p>
  <p>The Idea in Practice</p>
  <p>The authors recommend this five-step process for managing problem customers:</p>
  <h2>1. Reassess the Relationship</h2>
  <p>Determine why the customer has become a “problem.” Consider your company’s overall relationship with the customer, not just profitability. For instance:</p>
  <ul>
   <li>Is a customer who’s unwilling to spend (and therefore “unprofitable”) simply unaware of the range of services you offer?</li>
  </ul>
  <ul>
   <li>Have the customer’s needs changed?</li>
  </ul>
  <ul>
   <li>Has your company’s strategic focus changed, causing you to ignore (and offend) the customer?</li>
  </ul>
  <h2>2. Educate Customers</h2>
  <p>Provide information or training to help “problem” customers better understand and use your offerings. They’ll have fewer questions—and less need to constantly use your firm’s expensive resources. <span style="idea-in-practice-example"><span style="idea-in-practice-example-header">Example:&nbsp;</span> </span></p>
  <p>Fidelity Investments identified low-margin customers who were frequently phoning service reps. Instead of divesting them, Fidelity taught them to use its other (lower-cost) troubleshooting options, such as automated phone lines and the company Web site. </p>
  <h2>3. Renegotiate Your Value Proposition</h2>
  <p>If education doesn’t improve things, consider pricing and service strategies that restore the balance between the costs of serving the customer and the benefits generated. <span style="idea-in-practice-example"><span style="idea-in-practice-example-header">Example:&nbsp;</span> </span></p>
  <p>A supplier of commercial dyes for heavy machinery started charging extra for on-site service to some unprofitable clients as part of a renegotiated price structure. What could have been an obvious divestment situation became a win-win scenario for the company and its customers. </p>
  <h2>4. Migrate Customers</h2>
  <p>For still-unprofitable customers, consider moving them to a different distribution channel, a partner company better positioned to satisfy their needs, or a new form of payment. <span style="idea-in-practice-example"><span style="idea-in-practice-example-header">Example:&nbsp;</span> </span></p>
  <p>Satellite TV service provider EchoStar Communications created a prepaid service option for customers with bad credit history, thus migrating them to a different form of payment. </p>
  <h2>5. Divest as a Last Resort</h2>
  <p>If there’s still no hope of continuing a relationship with a problem customer in ways that offer enough value for both sides—even after going through steps 1 through 4—it’s time to end the relationship. But do so in ways that mitigate any negative fallout for your company. For instance:</p>
  <ul>
   <li>With B2B clients, communicate your decision to divest months before a contract-renewal date comes up. Explain your reasoning in person, and help clients recognize that termination may be mutually beneficial.</li>
  </ul>
  <ul>
   <li>With B2C customers, provide advance notice in person or by a human voice rather than by an after-the-fact email message or letter. Also, focus your explanation on external factors (such as mounting competitive pressure to change your strategy) rather than simply a desire to increase profits.</li>
  </ul>
 </div>
</article-ideainbrief><p>Sprint 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 <em>customers</em>, 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.</p>

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<p><span class="reprint">Reprint: R0804F</span></p>
<p>Problem customers can cost your business lots of money, but quickly ejecting them may not be the best way to relieve the burden. Mittal, of Rice University, Sarkees, of Penn State, and Murshed, of Towson University, explore the ins and outs of <em>customer divestment</em>.</p>
<p>Using real-world examples, the authors show how deciding to end a relationship with a customer segment or individual can increase profitability, improve employee morale, address capacity constraints, and bolster a business strategy. However, divestment also comes with potential downsides for various constituencies, including employees and remaining customers, both of whom may wonder whether they&#8217;re next. In addition, ethical and legal consequences&#8212;and the risk of bad publicity&#8212;always loom.</p>
<p>Before you rush to action, say the authors, walk through their five-part customer divestment framework. First, <em>reassess</em> the context of present customer relationships, looking beyond simple profitability. You may find that the most productive option is to <em>educate</em> customers rather than drop them. In some cases, if you <em>renegotiate</em> the value proposition with them, both of you will win. In other instances, you&#8217;ll want to <em>migrate</em> customers to other subsidiaries or providers, as long as the move is undertaken&#8212;and perceived to be conducted&#8212;in good faith. If it becomes necessary to <em>terminate</em> a customer relationship, use a direct, interpersonal approach.</p>
<p>No business can afford to squander its customer base, so divestment should not be boiled down to determining merely who is profitable and who is not&#8212;the strategic consequences are too weighty. In the end, the decision about whether to divest might prove to be the toughest customer of all.</p>

The Right Way to Manage Unprofitable Customers

Reprint: R0804F Problem customers can cost your business lots of money, but quickly ejecting them may not be the best way to relieve the burden. Mittal, of Rice University, Sarkees, of Penn State, and Murshed, of Towson University, explore the ins and outs of customer divestment . Using real-world examples, the authors show how deciding to end a relationship with a customer segment or individual can increase profitability, improve employee morale, address capacity constraints, and bolster a business strategy. However, divestment also comes with potential downsides for various constituencies, including employees and remaining customers, both of whom may wonder whether they’re next. In addition, ethical and legal consequences—and the risk of bad publicity—always loom. Before you rush to action, say the authors, walk through their five-part customer divestment framework. First, reassess the context of present customer relationships, looking beyond simple profitability. You may find that the most productive option is to educate customers rather than drop them. In some cases, if you renegotiate the value proposition with them, both of you will win. In other instances, you’ll want to migrate customers to other subsidiaries or providers, as long as the move is undertaken—and perceived to be conducted—in good faith. If it becomes necessary to terminate a customer relationship, use a direct, interpersonal approach. No business can afford to squander its customer base, so divestment should not be boiled down to determining merely who is profitable and who is not—the strategic consequences are too weighty. In the end, the decision about whether to divest might prove to be the toughest customer of all.

The Right Way to Manage Unprofitable Customers

Summary.

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