There are times when bending over backwards to make customers happy won’t result in better profits; in fact, it could cause a drop in profits. In a study by Mahendra Gupta, senior associate dean at the Olin School of Business at Washington University in St. Louis, almost 50 percent of 15,000 customers at one bank did not generate profit for the bank — they were unprofitable customers. In fact, the bank consistently lost money on 14 percent of its clients.
Unprofitable customers show up in every industry, causing companies to reconsider the value of customer service and to even consider “firing” those customers that cause the most loss.
“A universal increase of satisfaction for every customer does not translate into a universal increase in the profits you’re going to get from every customer. It seems counter-intuitive,” said Professor Gupta. “Making customers happier can be good for keeping your customers. But it doesn’t necessarily increase profits.”
There are many reasons customers become unprofitable. Gupta said firms can over-spend when they enhance customer satisfaction or cut a deal that costs the company more than they’ll earn from it. Gupta said companies have to know which customers have the most potential for growth, which are stagnant and which are losers.
For example, let’s say Acme Office Supplies has one customer that is a small company with limited potential to grow any larger and it only does part of its business with Acme. It would make no sense for Acme to offer the same level of resources to that company as it does to another similarly sized company that does do all of its business with Acme or that has higher growth prospects or that orders more expensive items. It makes more sense to customize services based on the potential of each customer, Gupta said.
“It’s very similar to having a family with one high achieving kid,” Gupta said. “You end up giving resources or opportunities to that high achiever that the other children don’t receive. It does not mean that you love them any less.”
Once a company understands that a customer is unprofitable and why, the next step is to decide what to do with them, Gupta said. With Acme Office Supplies, it may be possible to work with the customer to create a reduced package of services that sustains Acme’s profits, but is still attractive for the customer. Acme could also play with prices; finding a different price-service point to offer the customer. Acme also needs to educate its own sales force so that the incentives of making a sale don’t result in the sales person offering more than the company can afford.
The last resort, Gupta said, is to fire the customer.
“This really is not the best option,” Gupta said. “A customer’s unprofitability may be a short-term condition, whereas customer relationship is a long-term investment. One needs to ask, ‘What is the lifetime value of that customer? Will that customer ever be profitable?'”
“Working with customers is a mutual trust, not just a mutual business,” Gupta said. “Your customer has to trust that you are going to be there for them in good times and in bad. When the customer sees that you are going to wash your hands of them as soon as they show a loss, you can really hurt your credibility and reputation.”
However, Gupta said, a business cannot afford to keep losing money on a customer. Some customers simply become a drain on resources. Gupta noted that the study of the bank showed that a majority of its customers switch back and forth between being profitable and unprofitable. However, about 14 percent of the customers had never turned profitable during the study period — suggesting possible targets to let go.