It's not me it's you: Dropping a customer who doesn't spend enough

We've all been there. That customer who soaks up an inordinate amount of time and energy without spending enough for you to justify the level of resourcing.  And now it's crunch time - how should you move a customer who had face to face sales representation to a less frequent cycle and/or telesales account management without losing their business?  Here are some pointers from behavioural economics to change your service mix.

You don't know what you've got till it's gone...aka "Endowment effect"
You can be sure that the customer took face to face (F2F) representation for granted when they had it - but now that it might be taken away it's seen as a catastrophe. Endowment effect is our tendency to overvalue what we own - in your customer's case, they "own" the level of service they have been used to.

Tell them they can have F2F representation again...but they need to meet the criteria and to do that they can work with their very smart new telesales account manager who will help them get there. Will they like it? Most possibly not because it will be seen as personal affront. But guess what, you're in business and are entitled to treat customers who spend more differently. 

Business Class vs Economy, it's your choice
Procedural fairness explains our tendency to accept a judgment if it has been fairly considered and you know the rules.  If you've ever flown Business Class and then had to go back to Economy, you will know which you prefer, but you also know what it takes to get back to Business Class - money.  Do your customers know what it takes to get F2F representation?  Share the decision and the objective criteria (eg spend more than $5,000 pa...) to help them understand that they are actually in control of their servicing - all it takes is increased spend. 

But I'm special!  I'm an important account!
This type of change reminds the customer that they are one of many, upsetting their sense of uniqueness. Talk to the customer about what makes their business special and why you see a continuing relationship with them, albeit through a different channel.

Don't think about it as losing something
We hate to lose more than we love to win. In this case, the customer may react badly if they perceive the service mix as losing something so do everything you can to frame the change as a gain. Can they get more frequent attention via the phone for example? Do they get the resourcing support of a whole team rather than one individual? Will shorter appointments save them time?  Mark out potential reasons why F2F may not have been the best method of contact from that customer's perspective and consider how to use it in your justification. A word of caution though, the change will most probably be seen as cost cutting, so don't go too heavy on the "it's better for you" angle unless you can actually prove a better service level.

Quick like a bandaid
With unpleasant news, get it over quickly because we adapt more readily if we are not constantly reminded of what has changed. Handover the accounts (and do this properly by thoroughly briefing the new rep and telling the customer) and move on so the healing can begin. 

Still scared to act?
If you are still procrastinating about making the changes, know that you are falling into the trap of loss aversion - you are more fearful of losing the business of some difficult customers than motivated by the gains you can make by having your F2F sales reps concentrate on the accounts with most potential.  And you may well lose some customers.  So to get over this mental hurdle, do some number crunching. How much does it cost you to service those accounts, what's your margin, and what's the opportunity cost between these accounts and the potential accounts your rep could be growing?  Overcome your reticence with a good dose of fear busting.

By no means is changing service mix an easy thing to do, but it is an important aspect of managing your business. If you want to take it a step further and fire a customer, you may want to check out "Firing a Customer - what holds us back?".  Until next time, happy dropping!

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Firing a customer, what holds us back?

Having recently devoured Timothy Ferriss' "The 4-Hour Work Week", I have been contemplating one of the suggestions he makes for optimising your time; firing some customers.  Comes as a bit of a jolt, doesn't it?  Most of us spend our time and energy on attracting new customers and serving existing, so deliberately getting rid of a customer seems so...crazy.

The central tenet of Ferriss' book is that you need to place a value on your time, and knowing which customers are your most profitable and create the biggest return for your time is a big part of managing your business.  In Ferriss' case, "out of more than 120 wholesale customers, a mere 5 were bringing in 95% of the revenue.  I was`spending 98% of my time chasing the remainder...". So Ferris fired 2% of his customers.

Let's take a minute then to consider how two principles of Behavioural Economics can help us understand why we hold on to unnecessary customers, and how to change things.

Sunk cost
Knowing what it takes to get a customer means we are loathe to walk away once we have them.  It's a bit like those shoes you hunted everywhere for.  Oh the joy when you brought them home! But then upon first wearing they sent stabbing pain up your shins and you haven't worn them since. So have you thrown them out? No, chances are they are still in your closet, mocking you. You cannot bring yourself to bin them because you invested so much time, effort and expense in getting them. Sunk cost applies as readily to shoes as it does customers.  If you have customers who are more pain than they are worth, fire them.

Loss aversion
We are driven to avoid loss even more than we are to seek gain.  "A bird in the hand is worth two in the bush" comes to mind.  We often put up with customers that we should not because of two common reasons;

• we are terrified we will never replace them.  And, guess what? If you continue to invest your time and resources in unprofitable customers, you won't have those resources available to source new customers.  To reduce your loss aversion, do some number crunching. Add up all the hours and stress that your painful customers create, multiply it by your hourly rate and compare it to the revenue those customers generate for you.  Now contrast that with the hours, stress and revenue generated by your top customers. Feeling less scared of ditching the bad apples?
• we are terrified that our competitors will grab them. We are scared that if we fire a customer, then our competitor will move in and all of a sudden, ruin our market share.  It's possible.  But remember why you wanted to rid yourself of these customers in the first place - they were not making you enough money for the effort involved.  Let your competitors wear the albatross around their neck, bogged down with customers who are overly demanding and unrelenting whilst you swoop in on the profitable targets.

And for those who work in a small market where there are not many customers, and loss of one will dramatically impact your business, here's the tip. You still need to understand your return on investment from these customers. If you do not want to go as far as firing them, look to changing the service mix (from face to face to telesales for example, or weekly to quarterly visits), and establish new rules of engagement.  Consider criteria for which you offer premium-end service, and let them know what they need to do to qualify. They then have the opportunity to either improve their behaviour and spend or be satisfied with a less-resource intensive resource model from your end.

As always, let me know if you have a business issue for which you would like a Behavioural Economics perspective by emailing peoplepatterns@gmail.com. Until next week, happy firing.

This article also appeared in Smartcompany magazine.
Image from: http://cdn.thegloss.com/files/2011/02/fired.jpg