As companies realize this, “the most capable customers and the most capable suppliers will get together and get bigger and better,” predicts Jonathan Byrnes, a consultant and a senior lecturer at Massachusetts Institute of Technology. Every CFO, says Byrnes, should start acting as “the chief profitability officer, in charge of making more money from existing customers without adding any costly initiatives.”
At most companies, about 30 percent of customers aren’t profitable — and two-thirds of those aren’t ever going to be, according to Byrnes. Some have been plied with discount upon discount over the years, surrendered by quota-driven salespeople and approved by sales managers whose compensation depended on volume. But armed with further insight into your customers, “you don’t have to discount, because you know you have something they value,” says Selden.
Such selectivity means that, like bouncers at glitzy nightspots, executives will almost certainly have to “fire customers,” as management gurus put it. “With less business to go around, a company has got to know where it can contribute the most value,” says Barbara Bund, author of The Outside-In Corporation. “That’s where its future growth is going to come from.”
Splitting with unprofitable customers is far less dramatic than, say, any Hollywood bust-up. It may simply entail having a frank conversation about what you can and can’t do for them. Is there a more cost-effective way to handle their account? Maybe replacing customized items with a standardized version, or asking them to rely on Web-based support, or helping smooth out erratic ordering patterns.
By Selden’s estimate, it takes about six months to produce a customer-profitability analysis and segment the results into a portfolio of needs-based customers. Using software analytics, Selden sifts through cost data, records of individual transactions, and customer demographics. Selden’s consulting firm, Selden and Associates, has developed a process to perform this function — a much more comprehensive approach than CRM software systems. He first ranks money-making customers on a spectrum from least to most profitable. He splits that list into subgroups of customers that share certain needs based on their buying patterns, behaviors, or other information. The company also talks with customers.
Once a company is armed with such information, it’s in a good position to calmly explain to certain customers why it can’t continue serving them in the same way. But rather than issuing an ultimatum, it can indulge in a dialogue with unprofitable customers, showing them why prices have to go up, but also offering suggestions as to how they can cut corners. For instance, customers often request overnight delivery because they don’t trust their suppliers. Why not settle for a slower, cheaper route? Retailers can discourage profit-puncturing customers by cutting off their coupon supply, or adding a restocking fee on returned merchandise. These moves may foster a “you can’t fire me, I quit” attitude among unprofitable customers.
Your company’s newfound mission — the one that will serve as a competitive advantage, long after the word bailout has returned to its maritime roots — is to devote all of your resources to fulfilling and expanding your relationship with your profitable accounts. For certain retailers, that means crafting bundles of products that will be both appealing to customers and profitable — promoting an entire outfit, for instance, rather than just one discounted sweater. At Best Buy, that meant trying to change the behavior of roughly one million customers it had identified as unprofitable. The retailer also made it harder for the small number of aisle-wandering abusers to, say, return merchandise after applying for the rebate and then buy it back at the lower price that gets slapped on returned merchandise. The outcome: “Best Buy is doing better than all of the pure-play consumer-electronics companies,” notes Selden. By stark comparison, rival Circuit City has filed for bankruptcy protection and is closing nearly 200 stores; Tweeter, which manages about 100 stores, is shutting down. “Best Buy is well positioned,” notes Selden. “It will be getting an increasing share of the existing market.”