As I wrote recently, customers who are loyal to your business and contribute to your bottom line should be rewarded with an outstanding experience.

But what about unprofitable customers, the ones who cost you money? Most businesses have customers who call in 10 times a month asking for credits, return items more often than not or perhaps demand too much of your organization’s time.

These bad apples not only require a disproportionate share of resources, but they also result in longer phone waits and return lines and restrictions such as limited return times for your profitable customers.

1. Use Data to Identify Unprofitable Customers

To identify unprofitable customers, businesses must have enough data to track and evaluate returns and other drains on resources. Here’s a very brief example of how this analysis could work using only 4 data points:

Each business will have a different formula for calculating the actual profit of each individual customer and should reflect the value of returned goods, for example jewelry retains more value than clothing and online self service costs less than human support.

Customer B is contributing significantly to the bottom line, but will face longer wait times and potentially more restrictions because of Customer A’s buying behaviour. It’s a lose/lose for your business. So what do you do?

In my experience of firing customers at a retail organization, I found the easiest part of the process was determining which customers were actually profitable. The formula was 14 fields long and provided a very holistic view to the customer contribution. The worst 100 customers, combined, pulled $180,000 off the bottom line. The formula was scrutinized by Finance, Merchandising and Marketing, who all agreed that these customers were bad for business.

The hardest part was convincing the organization that we must fire these customers. The idea was completely against the concept of “customer experience” and the “customer is always right.” It was even more ludicrous that I, the head of customer experience, should suggest such a thing. What if the newspapers caught wind? What if these customers told their friends?

2. Give them a second chance. 

I was relentless in my pursuit, mainly because the extra investment in serving these unprofitable customers was standing in the way of us really showing our appreciation for our profitable customers. More than a year later we had the green light on two conditions: (1) that we tested the approach on the first 100 customers and (2) that we gave these customers every chance to change their behaviour.

We sent a very gentle and considerate letter, hand signed, to each of the 100 customers. We talked about their general purchase behaviour and suggested that perhaps we were not the retailer for them. We gave them the option of being more selective with their purchases in the future to maintain their account status. If the past purchase behaviour continued, we would be forced to close their accounts.

We waited for a response, but 100 customers were silent. Fast forward six months and we took a look at these customers one more time using our profitability formula. Eighty-nine had completely changed their behaviour and were now profitable.

3. Fire the customers who won’t improve

We were stunned at the turnaround. The program had worked and we could now expand the program further. The remaining 11 had continued their spending behaviour and we called them to let them know their accounts were now closed.

These customers were upset — not at us, but at themselves. Was there anything we could do to give them another chance? We let them know we would call them in three months to discuss the matter, but for now their accounts were closed.

The 100 customers who had contributed negative $180,000 to the bottom line were now contributing more than $50,000 in annual profit, a swing of almost a quarter million dollars annually. More importantly, our service levels and return efficiencies increased and contributed to the loyalty of our existing, profitable customers.

Sometimes the best thing you can do is lose some customers to please the ones you want to keep. But before you start firing, give them a second chance. That way, you’ll turn many unprofitable customers into profitable ones and have fewer to fire.

Click to learn more about Graham Kingma