Tuesday, February 24, 2009

Sacking Unprofitable Customers and CRM

An emerging paradigm in the business management world is that of sacking unprofitable customers and on the surface it makes sense. If I have a customer who costs me more in non-chargeable action than they do in chargeable action then in keeping them I'm losing money.

However, I get nervous with this view. Here are a few reasons why:

How are you measuring your costs?
A typical example of an unprofitable customer is they buy small value items and then absorb lots of time getting support from the helpdesk, tantamount to training. On the surface, this customer is unprofitable. They bought an item for, say, $1000 and every month they take an hour of the helpdesk's time as new users phone up to get help on using the product. Whatever value we put on the hourly rate of the support staff member, the maths doesn't look good.

And therein lies the flaw. If you are going to use cost allocation arguments to justify the 'value' of a client, make sure the allocation makes sense. Ultimately cost allocation is an accountant's trick to generate a number for the profitability of a component of a business; in this case, the customer. A fundamental assumption of most cost allocation models employed is the business is running at full capacity.

Its absolutely true that the helpdesk function costs money to run. However, if I have one customer call one day and two the next, my helpdesk costs are the same but the one customer does not cost twice as much to service as the two that called the next day.

In other words, if the helpdesk has capacity, why not help a struggling client? It will generate a lot more goodwill with the client than playing minesweeper. Of course if the business is looking to reduce costs by downsizing the helpdesk, then sacking the squeakiest wheels makes sense as this will reduce demand on the helpdesk staff, as long as it is done correctly.

Word of Mouth and Rising Stars
There are companies that screen incoming calls, determine the 'value' of the client through questions and if it is too low, route them to a low priority queue. The idea being that the 'low value' client will either go onto the internet (a low cost alternative) or go somewhere else.

If our helpdesk is close to capacity, we obviously want to service our profitable clients (assuming we have a valid measure for such a thing) to retain them and if we happen to lose a few less profitable ones along the way, so be it.

The problem I see here is twofold. First of all, a 'costly' client today may not be costly in the future. In our previous example, the staff, who often phone up the helpdesk for assistance may, after a time, become intimate with the product and strong advocates, internally promoting the purchase of new versions or add-on accessories.

They will go onto forums, their blog, twitter etc. and sing the praises of the product's functionality (which, in reality, is probably no different to the competitor's but they just know how to use it) and they will also move onto other companies and encourage them to use the same product.

By pushing people into long queues or onto often poorly designed support web pages with poorly designed knowledge base search engines, client adoption suffers and no one will sing the praises of the excellent post-sales support or product functionality. If you are going to try and make a customer more 'profitable' make sure the methods you use and the experience of the customer do not reflect poorly on the business. Otherwise, word of mouth suffers, customer upskilling suffers and a client who is a dog today will never become the star they could have been.

Don't get me wrong, I've known plenty of 'tire kickers' in my time and I still have a few lurking around but if I have the capacity to assist them or direct them to useful information, it costs me nothing more and there is the chance they will either promote me to others or engage with me later down the track.

Routing customers to long queues is disrespectful and offensive but offering an excellent support site with an intelligent layout and functioning knowledge base search engine or wiki is an excellent way to service customers at a reduced cost. Even better, offer up a forum where customers can interact with each other and support themselves. Not only will the customers get access to a vast body of knowledge, you get frank and honest opinions on your products and where they can be improved.

When is a Good Time to Cull and How to do it?
A great time to cull is when you are over capacity in servicing clients. At this point you have two options; either increase supply or reduce demand. Increasing supply, in most cases, means growing the business. Reducing demand essentially means getting rid of clients.

In my case, I currently work for myself. My goal is to obtain 40 hours of billable work each week. Let's say we were not living in tough economic times and I was finding it very easy to pick up 80 hours of work a week if I chose. What should I do? I don't want to work 16 hours a day and if I hire someone else to pick up the additional work (growing the business) I have the worries of salaries, government red tape and, in my opinion, the most important aspect, reputation management. If I screw up, I only have myself to blame, if someone else screws up, I might not be to blame but it is my reputation that gets damaged.

So my strategy would be to reduce demand. The simplest way to do this is to raise prices and there is nothing wrong with doing it. For some reason people attach a stigma for charging more for a desirable service. I know many businesses that, despite inflation eating into their bottom line, refuse to put up prices even modestly out of fear of a mass exodus of their customer base.

Another option would be to reduce your service offering to the most profitable services. In doing this, you must be absolutely sure removing one service will not damage another. A classic example is the grocery store that refused to meet the demands of a large soft drink company and subsequently refused to stock their product on their shelves. What they realised after the fact was that people were not interested in shopping there unless they carried that particular soft drink. The store may have had thousands of products but in removing just one, they compromised the sales of all the others.

If you are planning to reduce your service offering, look after those customers left out in the cold. Find someone who can meet their needs who have a good reputation. Nothing is louder than a disgruntled customer with an internet connection.

How Do you Ensure you Don't Obtain Unprofitable Customers to Begin With?
Obviously this depends on how customers are generated in your business but in the case of a sales team, make sure the incentives drive the behaviour you're after. If you are rewarding your sales team for bringing in new customers, of course they are going to cast their nets far and wide. If you reward them based on an increasing commission rate, based on the size of a given deal, not only will the salesforce go for larger customers, they will also encourage smaller customers to bundle orders together.

In short, be smart and think about how you would 'work the incentives' if you were in your employees' shoes. This also applies to support staff. If you are rewarding for the shortest calls possible, your staff will pick up and hang up on every second call to reduce their average call times. If your support staff are there to generate satisfied customers, ensure their incentives drive this behaviour. Being hung up on three times in a row (its happened to me) does not give me a warm fuzzy feeling about the company I'm trying to talk to.

Where Does CRM Fit in All of This?
The profitability of a customer is determined by their requirement for chargeable and unchargeable action in regards to your company. An accounting system generally only considers the chargeable actions i.e. goods purchased, service plans obtained etc. but it does not measure the unchargeable sales visits, support call volumes etc.

Most CRM systems have three primary modules:
  • Marketing (the activities performed to generate demand)
  • Sales (the activities performed to generate sales)
  • Support (the activities performed to keep customers satisfied post-sale)
These three modules cover a good fraction of the effort undertaken by a company in obtaining customers, selling to customers and maintaining customer satisfaction. If set up correctly, the chargeable and non-chargeable activities can easily be separated out and compared. While I am sceptical that the full costs of a customer can be accurately measured, given a company is rarely running at capacity, if any system can do it, it is the CRM system and certainly a correctly configured CRM system will be able to tell you the customers who are likely to be less profitable than the others in terms of the ratio of chargeable and non-chargeable time allocated to them.

More importantly, it will show you the nature of the activities they are undertaking. With this information, you can look to change their behaviour in a respectful way and make then profitable. alternatively you may find that the reason for their activities is a fundamental problem with your business. This article on Sprint's 'firing' of 1000 customers highlights the point.

Putting customers into little boxes of profitability is a complex and potentially dangerous activity. If you feel it is appropriate, make sure you have as much information as possible on your customers and their interactions with your business, as can be provided by a CRM system. Otherwise you could end up being the most efficiently run business in the world; one with no customers.

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