Tuesday, June 24, 2008

The Right Way to Manage Unprofitable Customers

The Right Way to Manage Unprofitable Customers.
By: Mittal, Vikas, Sarkees, Matthew, Murshed, Feisal,
Harvard Business Review,
April 2008, Vol. 86, Issue 4

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.

customer retention imperative is there, 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.

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.

Authors recommend five stage process for terminating relationships with unprofitable customers

Do we truly know why this customer seems to be unprofitable? Has buying decreased because of an unwillingness – or an inability – to spend, for example?

Share the company's perspective with customers.

Renegotiate the value proposition to achieve mutual benefits for the company and the customer.

Move the customer to a new provider (a partner or a competitor), channel, or form of payment.

Discontinue the relationship with the customer.

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