Terminating Relationships

Strategies to Terminate Customer Relationships

Companies rarely hesitate to terminate employee positions that serve no useful purpose. In a similar vein, a review of customer value might identify customers that are candidates for dismissal, including customers who will never be profitable or who serve no other useful strategic purpose.

More specifically, these include fraudsters, persistent late payers, serial complainants, those who are capricious and change their minds with cost consequences for the supplier, and switchers who are in constant search for a better deal. This certainly happens in reverse; customers sack suppliers when they switch vendors.

Relationships dissolve when one partner no longer views the relationship as worth continuing investment. In a B2B context, activity links, resource ties and actor bonds would be severed. However, even if there is no strategic value in a customer, dissolution of the relationship is not always an attractive option because of contractual obligations, expectations of mutuality, word-of-mouth risks and network relationships.

McKinseyOpens in new window reports that between 30 percent and 40 percent of the typical company’s revenues are generated by customers who would be unprofitable if their true cost-to-serve were applied. It is therefore important to conduct regular reviews of the customer base to identify potential candidates for dismissal. If this is not done, sales, marketing and service resources will continue to be suboptimally deployed.

Nypro, a plastic injection moulder, had 800 customers and sales of $50 million when it decided to move out of low value-added manufacturing. Many of these customers served no useful strategic purpose. Ten years later the company had only 65 customers, all of whom were large, and required value-added solutions rather than cheap moulded products. However, sales revenue had reached $450 million.

Sacking customers, sometimes called demarketing, needs to be conducted with sensitivity. Customers may be well connected and spread negative word-of-mouth about their treatment.

UK banks began a programme of branch closures in geographic areas that were unprofitable. Effectively they were shedding low value customers in working-class and rural areas. There was considerable bad publicity, government intervened and the closure strategy was reviewed.

There are a number of strategies for shedding unprofitable customers:

1.     Make them profitable by raising prices or cutting the cost-to-serve.

A company can simply increase prices to increase margin; customers who pay the higher price become profitable. If most customers are retained at the higher price, it suggests you were not charging enough in the first place!

Customers unwilling to pay the higher price, find insufficient value in your product given the higher price, effectively remove themselves from the customer base when they stop transacting. Where price is customized this is a feasible option.

When banks introduced transaction fees for unprofitable customers many left in search of a better deal. Similarly, you can reduce service costs, forcing customers to use lower cost channels, such as self-service online.

2.     Un-bundle the offer.

You could take a bundled value proposition, un-bundle it, reprice the components and reoffer it to the customer. This makes transparent the value in the offer, and enables customers to make informed choices about whether they want to pay the un-bundled price.

3.     Respecify the product.

This involves redesigning the product so that it no longer appeals to the customer(s) you want to sack. For example, the airline BA made a strategic decision to target frequent-flying business travelers they regarded as high value. They redesigned the cabins in their fleet, reducing the number of seats allocated to economy travelers.

4.     Reorganization

Reorganize sales, marketing and service departments so that they no longer focus on segments or customers you no longer wish to retain. You would stop running marketing campaigns targeted at these customers, prevent salespeople calling on them and discontinue servicing their queries.

5.     Introduce ABC class service.

A business-to-business company could migrate customers down the service ladder from the high-quality face-to-face service from account teams, to sales representatives, or even further to contact center or web-based self-service. This eliminates cost from the relationship and may convert an unprofitable customer into profit.

In a B2C context, this equates to shifting customers from a high cost service channel into a low cost service channel. A bank, for example, introduced a no-frills telephone account for business customers who needed no cash processing facilities. A minimum balance was needed for the bank to cover its operating costs. Customers who did not maintain the targeted credit balance in their account were invited to switch to other products in other channels. If they refused the bank asked them to close their account.

Empirical evidence on how companies terminate customer relationshipsOpens in new window is sparse. However, one study of German engineering companies reports that very few firms have a systematic approach to managing unprofitable customers.

Most respondents confirm that unprofitable relationships are commonplace; indeed, a fifth of firms have a customer base more than half of which is not, or not yet, profitable. Companies fall into three clusters in respect of the customer-sacking behaviours:

1. Hardliners take an active and rigorous stance in terminating unprofitable relationships, including the regular evaluation of their customer portfolio. Qualitative implications, such as a potential loss of trust in relationships with other customers or negative word-of-mouth do not seem to hinder their willingness to sack unprofitable customers.
2. Appeasers take a more cautious approach concerning the termination of unprofitable relationships, due to strategic considerations such as not playing customers into competitor’s hands.
3. The undecided are reluctant to terminate unprofitable relationships, mainly because they fear the costs of attracting new customers.

Awareness is when each party comes to the attention of the other as a possible exchange partner.