B2B Marketing: Unprofitable Customer

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UNPROFITABLE CUSTOMER B2B MARKETING

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April 2008

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hbr.org

Don’t just dump customers that cost you money. Use this framework to decide how best to fix or end the relationships.

The Right Way to Manage

Unprofitable Customers
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 customers, 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. Similarly, TXU, a large power provider in Texas, in 2005 implemented a tough-love marketing strategy in response to the competitive pressures of a deregulated energy market. It pulled the plug quickly on Brian Stauffer

by Vikas Mittal, Matthew Sarkees, and Feisal Murshed
hbr.org
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April 2008

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Harvard Business Review 95

The Right Way to Manage Unprofitable Customers

late-paying customers then charged them expensive reconnect fees, and it offered perks to those who paid on time. As a result, it reduced its “bad debt” from nonpaying customers and enjoyed productivity increases among employees who had previously spent a lot of time fielding calls from scofflaws. As one senior TXU financial executive told the Wall Street Journal, “A customer who calls you every day is less profitable than one who pays on time and never calls you.” Customer divestment, whereby a company stops providing a product or service to an existing customer, was once considered an anomaly. However, it is fast becoming a viable strategic option for many organizations. Certainly, the skyrocketing costs of acquiring new customers and the complexities of cross-selling to different market segments continue to make customer retention imperative. But some firms are taking advantage of new segmentation approaches and technologies that have made it easier to focus on retaining the right customers – those who will bring in the most revenue over time – and, by extension, to show problem customers the door. To better understand recent trends in customer divestment, we took a closer look at some companies that have rid themselves of customers, as well as some of the customers they let go. We pored over news reports, press releases, and consumer blogs and magazines to explore the evolving customer-company dynamic. In 2005 and 2006, we interviewed 38 executives from 32 companies in a variety of industries, including IT, manufacturing, health care, finance, and professional services. We also surveyed a random sample of 236 customers. Of the executives, 90% said they had given serious thought to divesting customers, and 85% said they had already undertaken divestment. Of the customers, 23% indicated they had been let go by a company in the past year. Our research identified four common reasons why businesses terminate relationships with end users: the declining profitability of specific customers, the lower productivity of employees as they deal with unprofitable customers, changes in the capacity to serve large volumes of customers, and shifts in a company’s business strategy. While most of

Some companies view customer divestment as a natural consequence of their evolving strategies.

the managers we interviewed had thought about divesting customers for one of these reasons, none wanted to acknowledge that publicly. Setting aside the immediate effects of such a strategy on profits and operations, the managers we spoke with worried about longer-term ramifications such as retaliation by clients or earning a...
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