We’ve talked before about taking advantage of the 20 percent of customers that provide 80 percent of revenue, but its also true that just 20 percent of customers create 80 percent of service costs.
Not all within this group though are a burden to your business, as not all cost more to retain and service than the revenue they bring in. Do you know who of your customers is costing you more than their revenue? Do you have a process in place of identifying such customers in order to take action and turn them into a source of growth?
Why should you identify your most costly customers?
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Can you distinguish between customers that are breaking the bank and those who aren't?[/caption]
All businesses incur a cost with each new customer acquired. However, some customers prove to be more costly than others. Some continually need customer support, others are so troublesome that they lower team morale, some demand free features or add-ons, and others need to be continually chased month after month for payment.
In the pursuit of growth, companies are always looking to retain as many customers as possible but some may actually be more expensive to retain than the revenue they provide. Knowing who your most costly customers are, is critical to growth.
Who are your most costly customers?
A company’s most costly customers are those that bring in low revenue and consistently need servicing.
Why though is it that low revenue customers are the most costly, can’t any customer potentially be more costly to serve than their revenue input? Yes, every customer can eventually outpace their revenue input if they use a significant amount of a company’s resources.
However, as higher paying customers bring in more revenue, there is a bigger profit margin to absorb service costs. It is difficult then for demanding high paying customers to cost more to serve than the revenue they bring in. Low revenue unhappy accounts offset their revenue input the quickest, as they have the lowest profit ratio.
Why cost vs. revenue is not enough
In order to determine costly customers, companies must measure the amount of resources that each customer consumers from a business; be that phone calls, meetings or maybe the time spent fixing product issues.
A good start then is investing in a customer service tracking tool; this can begin, for example, as simply tagging customer service call-ins.
Tools such as these help companies identify which customers are requiring the most time and resources, and combined with revenue they are great at determining the cost of each customer.
However, while these tools are a valuable addition to account management, used by themselves they rely on the assumption that all costly accounts are the same and are thus a problem.
How to identify your ‘real’ costly customers: add a layer of data
The problem is that equating service costs vs. an account’s revenue is that you’re missing part of the puzzle. The key difference is whether the account is loyal/happy or not, which will be reflected in the reason why they are demanding so many resources from you.
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Happy costly to serve customers are not the same as unhappy costly to serve customers[/caption]
Take for example a happy low-revenue customer that requires a costly amount to service. This group is costly because they find your product valuable and wish to maximize their success with it. So while costly, this group is worth more than just their immediate revenue; they are a source of sales, referrals and brand advocacy. While furthermore, the high cost to serve some demanding loyal customers may only be for a set period of time (but longer than the average), after which the cost to serve would drop.
On the other hand, unhappy low-revenue customers might be complaining for many different reasons. This could be because of a resolutely difficult customer or unresolvable problem (potential contract termination), or maybe it is that the multitude of issues arising are all the result of a more underlying structural problem, and if solved would eliminate much of the cost to serve?
The important thing here is that you can gain insights into that distinction by combining the costs and revenue of each account, with loyalty data. The easiest way of doing this is by carrying out a Net Promoter® survey of each account, which will also immediately give you deeper insights into why the account is happy/unhappy.
Identifying your worst customers is about growth
Knowing who are your most costly customers is not simply a fact-finding mission to pinpoint revenue-draining customers and then watch in despair. It is about using this process of identification to take active measures to turn these customers into a source of growth.
To do this, there are two camps that costly customers fall into. There are those that are just not a good fit. No matter how much you help them their problems will never really be resolved. The problem they have and the product you provide, as well as any up/cross-sell offers, simply don’t align.
And then there are those accounts that are unhappy with your product or service, but with the right direction and service can be changed and the demands they put on you diminished. These are companies that are only momentarily dissatisfied, for example the customer is unable to meet a particular goal with your product but you do have a new feature or product that can.
Managing such customers then is about moving these customers into uncostly positions. Either by improving upon structural issues which will improve loyalty and satisfaction or by raising their revenue, which will, 99 percent of the time, improve satisfaction and reduce service costs.
During these efforts then, customers should be continually surveyed, to determine how effective the actions taken by a company have been. If these customers continue to show little improvement then maybe ending their contract is the only logical growth orientated course of action.
