For years marketers have suspected that the saying customer is king isn’t always a good principle for running a business. As competition in many markets intensifies, winners will be companies who build a portfolio of ‘good’ customers while avoiding as many as possible of the ‘bad’. Good customers not only provide more profitable business, but they’re also easier to build effective relationships with. Recruiting customers who are good now, or who will be good in the future and avoiding bad customers (or containing the risks of bad customers who slip through the net) will also be vital.
Of course, ‘good’ and ‘bad’, when applied to customers, should be defined primarily according to your objectives rather than morally, though there is often a correlation between organisational and moral definitions. ‘Good’ and ‘bad’ are relative terms. Their definitions change with time, with legislation, strategies and target marketing of companies. However, the main attributes that most companies would agree are important to them are a mixture of value, how the customer thinks and how the customer behaves.
Playing by the rules
Let’s start with value:
should yield value that exceeds what it costs you to service them, taking into account all your costs. The customer’s ethics are also important. A good customer is one who stays on the right side of the law in all their dealings with you. These days, there are too many cases of sharp practice for this not to be a concern. Prudence may also be important this may affect their ability to settle their invoices. Punctuality in responding and in paying invoices helps as well. Responsiveness is also important good customers are those who respond to marketing communications that are relevant to them and are willing to try new products. Closely related is willingness to observe rules and complain only when justified, in which case you can improve your service and reduce later complaints. Good customers are also prepared to recommend you.
For some companies, a good customer is one who is persistent i.e. unlikely to switch though this depends on whether the product is supplied intermittently or continuously. Related to this is stability or predictability. Customers can be good in one area and bad in another. It is stability which allows you to trade with them profitably.
have characteristics largely the opposite of those listed above. For most organisations, the key bad characteristic is current or likely future unprofitability, though there are circumstances in which unprofitable customers are highly valued, perhaps as recommenders. Companies may include in their definition of bad customers groups like debtors, switchers, liars, or fraudsters. Bad customers learn quickly because the incentive is often large (potential gain) and in some cases transfer their learning to others quickly. However, bad customers are not to be avoided at all costs. A customer who pays slowly can be asked to prepay, or may be refused products where the risk of non-payment is particularly high.
Risky business
Techniques for controlling the risk of bad customers range from rapid identification of risk levels and applying policies for matching forecasted risk with your offer. Detailed techniques include refusal to deal; charging more; asking for deposits or complete repayment; asking for assets to be put up as security; asking for commitments to be underwritten by third parties; and escalation of risk accepted as the customer demonstrates a history of staying within risk parameters. The latter may be part of the normal process of customer management, where it is accepted that not all customers are perfect and risks must be taken with some. However, it is not possible to accurately predict risk and value, which is why most companies balance their approach by accepting customers of varying amounts of risk. In some markets there are simply not enough ideal customers for a company to focus on while maintaining economies of scale. Companies may need to be a minimum size to balance risk and value. We all know small businesses that have been dragged down by one large debtor.
I have worked on many projects where companies are getting to grips with the issue of good and bad customers. There are six lessons that marketers can learn:
1. Define good and bad customers,
recognising that most customers have
a mix of good and bad attributes.
2. Don’t be afraid to think the unthinkable, in terms of where and how badness can occur.
3. Ensure your databases and data sources allow you to identify good and bad customers.
4. Measure performance in terms of the net value you obtain from each customer including all exposures and not just routine costs.
5. Estimate your net exposure to bad customers, and calculate whether it is worthwhile reducing exposure.
6. Recognise the extent to which the incentives you give your sales and marketing people may lead to your company ending up with too many bad customers, who naturally are easy to recruit.
Finally, businesses should always bear in mind the importance of developing, testing and refining alternative strategies for dealing with bad customers, combining limitations on dealing (and in extreme cases refusal to deal) with techniques to reduce exposure to bad customers who have ‘got through’.
