Unprofitable customers and their management Michael Haenlein , Andreas M. Kaplan Gulakova Olga 622 group
The good into the pot… the bad into the crop Profitable customers Lufthansa - HON Circle program (24 -hour booking guarantee, limousine pickup) HSBC - HSBC Premier (24 -hour Premier call centers help in all financial problems) Hyatt - Hyatt Gold Passport (72 -hour guaranteed room availability and complimentary upgrades with access to the private Regency Club lounge ) Unprofitable customers Customers with high cost-to-serve and low revenue Up to 30% in both B 2 B and B 2 C
ABCs of Unprofitable Customer Management Avoid their acquisition in the first place Bear in mind potential rescue operations Catch the possibility of abandonment Draw up a cost—benefit analysis Ensure familiarity with your environment Facilitate biting the bullet
Step # 1: Avoid their acquisition in the first place To modify product or service offering such that it discourages purchase by customers who are likely to be unprofitable To reconsider their current customer acquisition strategies: if prospective clients need too much convincing and promising before they decide to try an offering, this may indicate that they are either not interested in what’s being sold or difficult to satisfy in general.
Step # 2: Bear in mind potential rescue operations The transformable - company operates its business in an inefficient manner - an unprofitable customer today may become a very profitable client tomorrow (using CLV) The misunderstood - the product or service may simply not be adapted to the needs of its customers (features the customer does not value)
Step # 3: Catch the possibility of abandonment Indirect approaches - cost escalation strategy (increasing relational costs in the hope that unprofitable customers will leave the company of their own accord) - withdrawal strategy (entails reducing the intimacy of the customer relationship) Direct approaches -fait accompli strategy (openly tell the customer that it wishes to end the relationship) - state-of-the-relationship talk (explain to the unprofitable customer the reasons for its low profitability, and trying to convince the business partner to change its behavior)
Step # 4: Draw up a cost—benefit analysis Valuing the real option of abandoning unprofitable customers Consider benefit from abandoning when calculating CLV Campaign A Campaign B one type of customer - net profit of $46 in Periods 1 and 2 Acquisition cost - $50 Discount rate - 15% CLVa = $ - 16 CLVa = $ 273 (in case of abandoning “bad” customers after Period 1) CLVb = $ 75
Negative word-of-mouth and indirect abandonment cost - current customers - potential customers (stronger negative effect of Wo. M) The impact of negative Wo. M spread by abandoned customers can be compensated by making other components of the offer more attractive. Compensation (research among clients of mobile phone provider) : New customers: offering lower prices Existing clients: proposing superior network quality The power of social networks the friends of an unprofitable customer are likely to be unprofitable too Analyze tool: On the positive side: there is the value of the real option of abandoning On the negative side: one needs to include the cost of compensating the impact of negative Wo. M spread by abandoned customers.
Step # 5: Ensure familiarity with your environment Class actions and legal restrictions Competitive environment 1) a rival firm could well become a new haven for cast-off unprofitable customers 2) competitors could recognize a signal of the superiority of the abandoning firm’s CRM soft- ware and vie for the desirable ‘‘kept’’ customers
Step # 6: Facilitate biting the bullet Be explicative Do not be shy in explaining the reasons for your decision Be efficient It is better to abandon unprofitable clients in one fell swoop Be direct It is therefore wise to be open and to apply a direct fait accompli abandonment strategy Be open It is preferable that you communicate openly with the public about unprofitable customer abandonment Be personal Instead of sending your fired customers a letter contact them directly Be clever There are many different ways to phrase and communicate an abandonment strategy - pick the one that harms you least
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