Dealing With Bad Customers
Tom Taulli 02.22.06, 10:15 AM ET
Los Angeles -
After her client brought a different woman to every appointment to look at vacation homes in the Hamptons, a light went off for Diane Saatchi. "After about six different women, it was clear that he was using house hunting as a way to impress the women," said Saatchi, a senior vice president with The Corcoran Group. "He had no intention buying."
She quickly dropped the client.
But aren't "customers always right"? Maybe so, but just because they're right doesn't mean there aren't bad ones that drain resources. They also have an opportunity cost. That is, a business has less time to focus on top customers. Bad customers often demoralize employees because of their complaints and excessive demands. Moreover, they are often the source of negative word-of-mouth.
So, how do you deal with bad customers? Here are a few tips:
Finding The Bad Seeds
For many years, thousands of AOL customers took advantage of free trials and then free months from the Internet service provider, now a unit of Time Warner (nyse: TWX - news - people ). Obviously, these customers were consistently unprofitable for the firm.
Dennis E. Gonier, former executive vice president of member retention at America Online, asked the acquisition department a simple question: "Why do we continue to mail these people even though we know they have no intention of paying us?"
The answer: "It’s our best list."|
Gonier attacked the problem and, as a result, the portion of "free riding" fell from 30% to less than 8%. "When we confronted these freeloaders, their response was usually, 'Well, your product sucks anyway'," he said. "It's funny how it [the free service] was worth the cheating for years. The point is we knew these folks would not talk favorably about AOL from that moment on. That's a bad customer."
So how can you spot a bad customer? Gonier has some suggestions:
--The customer is acquired through the least expensive method or needed a high promotional inducement. The "least expensive" method suggests they sought you--and that is often too good to be true. The promotional inducement suggests sensitivity to price or incentive, which is not good for long-term loyalty.
--The customer has high "service costs" or contacts the company above average.
--The customer exhibits switching behavior (now or in the past) in your product or service sector or in similar sectors.
--A definite signal you have a bad customer: All contact is through their attorney.
Targeting The Right Customers
Fred Reichheld, customer loyalty expert and author of The Ultimate Question: Driving Good Profits and True Growth, says when companies disappoint their customers, they become detractors.
"Our research has shown that from 25% to 50% of customers are detractors at typical firms today. This enormous unmeasured liability is throttling corporate growth," he said.
Reichheld considers the best way to determine the extent of this problem is to ask customers "the ultimate question": On a scale from zero to ten, how likely would you be to recommend us to a friend?
Detractors score 0-6. "By identifying them, it is possible to probe for root causes and solutions," said Reichheld. "When there is no economically rational solution, then the best alternative is to help those customers find a better supplier for their needs."
Take HomeBanc (nyse: HMB - news - people ), a regional mortgage banker based in Atlanta, Ga. The company offers a refund without any conditions. The result: The policy identifies bad customers and also teaches salespeople how to avoid such customers. "Home Banc returns fees to less than one half of 1% of customers," said Reichheld. "But the closed loop feedback creates far more value for the firm and minimizes the number of 'bad customers.'"