Should You Fire Your Worst Customers?
It is not a surprise that a small number of customers contribute the majority of profits. But what should you do with low value customers that cost more money than they provide in income? 
Banks have been at the forefront of using Customer Relationship Management (CRM) to quantify the value of individual customers, and manage relationships to improve profitability. This has often resulted in “de-marketing” low value customers, either through fee increases or service limitations. Those with long memories will recall when First Chicago (now JP Morgan Chase) notified low balance customers that they would henceforth have to pay a fee if they used tellers instead of ATMs. It was a PR debacle and resulted in significant customer defection, although First Chicago claimed it was financially successful. At the time, the attitude was “If they leave, so be it. We don’t make any money on them anyway.”
Only last year (July, 2007), Sprint “fired” over 1,000 “unprofitable” customers — they terminated their service because they used the Call Center too many times.
Banks are more subtle in their approach these days, but there is still a significant effort to “fee-up” low value customers. For example, Wachovia charges a fee if customers use the Call Center more than twice a month unless they have an account with $4,000 minimum balance.
Is it a good idea to de-market your lowest value customers? Usually not.
Banking is a primarily a fixed cost business. While many banks have calculated their cost per customer at about $200 (fully loaded), the marginal cost is only about $35-40. And even then, most of this is either fixed or step variable. How many customers would you have to lose before you close a branch, eliminate a check sorter or reduce branch staff? How many branches do you have that are close to the minimum staffing required just to keep them open? The truth is, not much expense would go away unless there was significant customer loss or behavior change.
Certainly there are, and will always be, customers who over-use staff resources. We have found this is often caused by service delivery issues that can be solved by other means. Is there a problem with the way their product works that needs to be fixed? Are they in the wrong product and should be transferred to one better suited to their needs? Do they keep coming back because we haven’t solved their problem on the first call (“one and done”)? Can we help the customer get comfortable using a lower cost channel?
Successful businesses succeed by growing customers. Banks spend a lot of time, effort and money to attract new customers, and in today’s highly competitive environment customer churn is a significant issue. Running them out the back door – whether intentionally or not – isn’t in our best interest.
What should we do with low value customers? Don’t push them out the door, but put a magnifying glass on the reasons why they are unprofitable. Fix the problems at the source, whether they are internal to the bank, or rooted in customer behavior. Because of the low cost to keep a customer on the books, small improvements in the cost of service delivery or customer revenue can result in significant financial benefit.
And as an aside, what about Sprint? What do you do with customers who call you 25 times a month? Yes, some of these customers were real problems, but perhaps much of the problem lay within Sprint itself. It lagged peers in customer service ratings. It lost 1.2 million customers in the last half of 2007 while the rest of the US mobile market grew by almost 10%. Maybe they would have been better off putting their energy into taking care of the customers they had rather than blaming their problems on “poor customers that should be cut loose”.