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Manage the unprofitable
July 1, 2009 By: Carl Hughes LPGasAll experienced retail propane distributors have learned to appreciate that a quality customer base is built one customer at a time with expense and hard work.
But we all know that a class of customers we really hate to deal with – those who are unprofitable – comes with the territory.
Customers can become unprofitable for a number of reasons. Perhaps their volume has shrunk to the point that delivery costs exceed the gross profit. Sometimes a client’s service needs have grown so extensively that they consume company resources and the cost of service no longer makes economic sense. Other times the customer’s payment habits are so slow that the cost of carrying them exceeds the profits from the sales.
Finally, there are some customers who are simply so rude and truly such a pest to the staff that they are more trouble than they are worth.
For whatever reason, dealing with unprofitable customers is part of virtually every retail business.
However, termination of customers is not without risks. Divesting of customers is not done in a vacuum but conducted with some visibility by the existing customers and employee base. Profitable customers may see your actions in “firing” another customer as a threat to them. They may think they are next, and they may actively seek another supplier.
By divesting of a propane customer, you also drive them to your competitor, who may be able to convert them into a profitable account. This changes the competitive dynamics of the market in your competitor’s favor.
Finally, the front-line employees may not understand the process fully and question if the customers have been dealt with properly. This misunderstanding can lead to reduced employee moral.
In the April 2008 issue of Harvard Business Review, in an article entitled “The Right Way to Manage Unprofitable Customers,” the authors suggest a five-step approach to dealing with these customers. This approach can make sense for us in the propane business as we evaluate our most difficult and unprofitable propane accounts.
1. Reassess the relationship – Is this a customer whose needs have changed and possibly can become a solid customer under a new proposal? An example is a gas-log-only customer. When the system was installed he had good usage, but volumes have been slowed with the last energy spike. Can a revised annual lease fee be charged to provide a return to the company so the relationship makes sense in years when they don’t use propane?
2. Educate the customer – Does the customer understand fully all of your level payment or automatic delivery offerings? Can the application of your programs, when understood by the customer, turn the situation into one of profit and a satisfied customer?
3. Renegotiate – Consider approaching the customer whose needs have changed with a new proposition. While a particular commercial account may have been profitable years ago under these terms, the costs of servicing that account today may now exceed the gross profit. Sometimes it can make sense to offer a revised plan.
4. Migrate customers – If the level of service requires more resources than you can provide, can you offer a third-party trade ally who is more capable of providing the service the client needs, while you keep the delivery load?
5. Divest as a last resort – If you have truly exhausted the above four options, then and only then does it make sense to terminate a relationship with a propane customer.
Terminate successfully
If you must end a customer relationship, the authors offer some very valuable advice. Their studies have shown that “consumers pay very close attention to the reasons they are divested and assign blame accordingly.”
Studies show that when the customer is informed of the reasons for termination and have had a chance to reject alternatives, they are significantly more understanding. This leads to more retained quality customers and less secondary issues with good customers and employees.