Sales Initiative: Dealing with unprofitable customers: 4 tips to a turnaround

September 19, 2016

By Patrick Schneidau

Companies grapple far too often with the best way to deal with unprofitable customers. More often than not, organisations take a path of showing these customers the door, when there are palatable, smart alternatives that can salvage those hard-earned relationships and also change the profitability equation. Make no mistake: there's no question that customer profitability is within your power to change.

The most important first step is for sales and pricing teams to find a common path and to function as a partnership, rather than having sales criticise the pricing team for setting an unreasonable price for 'their' customers. A strong relationship enables both teams to perform a win/loss review and correct the pricing strategy, both of which help to increase profitability.

Sales reps often perceive certain customers as highly profitable because they bring in a large volumes of business. But by taking a deeper look, the analysis may reveal the customer is actually far less profitable than originally imagined. By identifying these customers and taking corrective action, companies can halt the revenue and margin leaks.

If your company is struggling with what to do, here are four steps to begin your evaluation:

Tip #1: Segment customers and peer groups to find underperformers

To ensure you're comparing like customers, the process of identifying underperformers begins with customer segmentation.

Geography and size of the engagement are not the only ways to segment customers. While it's a good start, dig deeper into a broader set of variables.

Customer segmentation enables you to compare a customer's performance against a peer group in that segment. Using a waterfall analysis allows you to see how much it actually costs to serve different customers, and then compares the data to other peer groups to identify profit margin leaks.

Tip #2: Establish the cause behind underperformers

There are any number of variables to explain why a customer is unprofitable for your business. To fully understand these reasons, companies today are using data-driven analytics to identify why.

Prescriptive customer analytics provide in-depth information on each customer's profitability and can provide guidance on how to solve the prevailing issues. In addition, taking further prescriptive action by having a face-to-face meeting with your customer can help identify under performance issues.

Tip #3: Use customer analytics and guidance to identify specific actions

When choosing how to handle unprofitable customers, you can take two main paths: Work to improve the profitability of an underperformer, or phase them out of your company. Using customer analytics and conducting a cost-to-serve analysis enables you to make smart, informed decisions regarding which solution is best for each customer.

Your regional sales leader should keep a dashboard to show how each region is performing. Look at these numbers weekly and monthly, and set up notification alerts when a customer goes below a certain profit margin threshold. This helps your sales reps remain proactive and takes the guesswork out of deciding which customers to eliminate.

Tip #4: Give sales an incentive for improving the profitability of underperforming customers

While first instincts may be for you to drive away underperforming customers, consider whether they could be profitable for your business. Some ways to do this include the following:

• Discontinue discounts.
• Renegotiate existing contracts.
• Make customers pay for all services they use.

It's important to give your sales team an incentive for improving the profitability of underperforming customers. At many organizations, the sales compensation structure motivates reps to close deals that may actually hurt profitability. You can avoid this dilemma by implementing data science-driven pricing guidance that boosts profit margins, and ties compensation to margin goals and price improvement.

In conclusion

In reality, not all customers have the potential to become profitable. If none of these suggested techniques work, it may be time to phase out those companies.

Unprofitable customers consume more resources than they pay for, divert attention away from your company's profitable customers, and create tension between your sales and pricing teams. By following these tips to proactively deal with these customers and using data-driven solutions, you're on a sure path to help make them profitable.

By Patrick Schneidau, Chief Marketing Officer, PROS, Inc. Revenue and Profit Realisation Solutions.