How to manage unprofitable customers in 3 steps

Posted By Pierre-Nicolas Schwab on 14 Feb, 2018

Not all customers are alike. Some of them cost you money. Here are 3 simple rules to solve that problem. As you will see once again market research is instrumental to the solution.

Identify unprofitable users and ensure they are not becoming clients

The best way to avoid unprofitable customers is to actually not take them onboard. That’s where a good market research study helps.
As part of your market research you will have to identify the different market segments (in other words categorize customers according for instance to their needs) and assess the profitability to serve each of them.
If you do your homework well, you may end up with the conclusion that some market segments are less profitable (higher acquisition costs, higher costs to serve the targets, …). With that in mind you are now well equipped to make a decision on where to focus your efforts.

Design products according to customers’ needs

The problem

Understanding needs is essential to make sure your product’s features are expected and needed by your customers. If you misunderstand customers’ needs you won’t be able to propose the right product and won’t be able to attract the right customers.in

The solution

Different market research techniques can be used to assess the value perceived by customers for certain features. If you have a prototype you could test this prototype through either a focus group or through observation. The latter would consist in observing how prospective customers use the product. If your product is digital and already used by real customers, you could use the data generated to explore how it is used and discover which features are rarely or never used.

Get rid of unprofitable customers

The problem

Sometimes it’s just impossible to avoid embarking unprofitable customers. And if the fraction of unprofitable customers is too large, you need to take action.

The solution

Define strategies to abandon unprofitable customers ! There are several strategies available to fix the situation about the unprofitability of a customer.

1. increase relational costs

   Offer lower service quality, less or no advantages. In short you create the conditions to dissatisfy unprofitable customers and hope they’ll leave.

2. inform the customer gently about the situation

   State-of-the-relationship talks are useful to ensure the customer understands your position. Sometimes his unprofitability can just be the result of his misunderstanding of the “rules of the game”.

3. take action to terminate the relationship

   That’s of course the very last action you should take. We presented over the years various examples of such abandonment strategies : American Airlines trying to get rid of its single most unprofitable customer, Sprint sending letters to hundreds of unprofitable customers. And there must be many other examples.

Analyse the potential costs of abandoning customers

If you decide to actively terminate the relationship with some of your customers, beware of the consequences. You won’t lose money directly because these customers were already unprofitable. But the negative word-of-mouth they could propagate may have negative indirect consequences for you.