By transitioning away from low-value customers, you can
devote the right amount of time, money, and resources
to acquire and retain high-value customers.
“The customer is king.” We have all heard this common marketing truism, but allow us to update it for the modern era:
“The right customer is king.”
The reality is that not all customers are created equal, and businesses should not be wasting time and money trying to please unprofitable customers. Instead, businesses should segment their accounts based on profitability and lifetime value, and marketing resources should be allocated proportionally to this value. In the case of unprofitable customers, this means that very little of your time and effort should be spent servicing them. Oftentimes, these customers should even be gracefully removed from your roster because they are costing you money.
Consider the example of a salesperson at a manufacturing company who is fielding a $500 order. Over the next few weeks, he will dedicate time to speaking with that client on the phone, placing the order — and making sure the order is produced, packaged, and shipped correctly. In this scenario, it is entirely possible that he will invest more time in this $500 customer than another 6-figure customer who is considering increasing his or her order. This salesperson’s time would clearly be better spent preparing a customized presentation on new products and bundled packages that would convince this 6-figure customer to double his or her order.
Revenue and profit are not the same.
It is easy to view revenue as profit and assume that the $500 dollar client is profitable. However, this view ignores the investment of time and the opportunity cost of this time. By removing the distraction of unprofitable customers, you will free up more of your time to focus on profitable accounts with the greatest possibility for growth. By investing more time on these high-value customers, you will be able to maximize profits. You will also increase their loyalty to your company, which will lead to high returns in the long term as those key accounts continue to grow. Wondering where to start? Go through your customer database to calculate your profit margin on each account, in order to determine which clients are losing you money. Your margin will be low on small accounts where you invest substantial amounts of time. However, it could also be low on large accounts where price cuts or time invested may still outweigh revenue.
Reasons why customers become unprofitable.
Before cutting any client loose based on your profit margin, you should consider the overall quality of the customer relationship, along with what is making the account unprofitable. Here are a couple of examples:
- A once profitable, low-maintenance customer has cut spending with you due to a customer service error on your part. In this case, it may be preferable to invest in rebuilding the relationship rather than cutting the business loose.
- A low-margin customer continues to call your sales representatives daily, even after receiving special product training. This account is unlikely to ever be profitable, and is not worth taking the time to renegotiate a new contract.
There is no exact formula, but you will typically want to fire those customers who are unprofitable due to their order size, annual revenue spent, and the amount of hand-holding needed.
The art of divesting customers with dignity.
To divest your company of unprofitable customers, you must have both the courage and skill to do so without tarnishing your reputation. Instead of sending a form letter or a brief email to these customers, you should discuss the divestment in person or over the phone, and work with them to find another partner to service their needs. A study published in the Harvard Business Review found that 80% of B2C divested customers felt angry, frustrated, or embarrassed about the process, while comparatively few B2B companies felt the same way.
The key difference was due to how the divestment was handled. 90% of B2B managers used direct, interpersonal methods to communicate the decision, while 70% of the B2C divested customers were given no advance notice of the termination. An overwhelming number of customers surveyed also stated they would have preferred to be notified by phone call or in person, rather than by mail. By personally reaching out to customers far ahead of a contract’s end, you can start an honest conversation about the value and equity of the relationship — which may even lead to them being onboard with the divestment.
Ensuring a smooth and amicable transition.
Once the decision has been communicated, work with the customer to establish mutually agreed-upon schedules and benchmarks for divestment. You should help make the transition as smooth as possible for them, in order to minimize bad feelings. One way to do this is to negotiate with a partner or competitor who might be able to take on the client. Whether or not you facilitate the move in its entirety, you should at least provide divested clients with a list of alternative providers. By making the client feel informed and involved in the transition, you will maximize the success of the divestment.
Use your divestment data to improve prospecting.
By divesting low-value customers, you will be able to spend the right amount of time, money, and resources on acquiring and keeping high-value customers. The data amassed on which clients are the most profitable should also be used to help marketing and sales staff to target the right new customers. After redefining the demographics and purchase behavior preferences of your ideal customers through this data, you will be able to concentrate your customer acquisition efforts on high-value prospects and minimize the need for divestment in the future. In the long run, the divestment process will result in higher returns from all marketing investments.