6 Ways to Increase Customer Profitability
The dark side of existing customer management
Today’s newsletter will cover 6 ideas of how to increase existing customer profitability in your business. I will go through a couple of not-so-gentle customer management ideas, one at a time, which will help your business increase its earnings.
Before we proceed, a word of caution.
I’ve briefly touched on Push vs Pull techniques in previous newsletters (Promotion vs Engagement). Another way to think about this would be whether your customer leadership style relies more on the carrot or the stick.
Ultimately, this is not just a choice of how to do customer and commercial management but it’s also a matter of business philosophy; what you believe in, what you think is right or wrong, and what you would like your business to be known for.
Without further ado, here is what you came for:
Remove inactive customers
Customer profitability metrics are usually presented as average values. For example, your customers might spend an average of $12,000 per year on your company’s products across 12 purchases over the course of the year and spend $1,000 in each purchase, on average.
There will be a data distribution behind these averages — higher and lower — which reflects different type of customers and different behaviours. By removing the customer population that is least active (e.g. zero spend), the numbers will suddenly start looking much better.
Note that you can remove these numbers simply by choosing not to include this data when you present your customer profitability metrics. In other words, your KPI performance metric “Average spend per customer” then becomes “Average spend per active customer”.
Voila! The latter will give the impression that your client performance is stronger than it actually by selectively presenting the better-performing figure.
You can also remove the inactive customers from your customer base for real, typically by writing to them and give notice that their account will be closing.
Important considerations:
Do not set the cut-off threshold too low, as some customers might naturally reactivate or start spending again unprompted. When removing such customers, you’ve literally pulled up the account by the roots and it can never grow back.
Watch out for customers with multiple or linked accounts. For example, consider the case of multiple accounts with different activity levels within the same family unit, or a customer account with inactive usage (i.e. a reserve/back-up account) whereas the same customer uses another account as their active main account.
Implement new fees
We’ll look at raising prices in a minute, but before you go down that route you may wish to explore revenue diversification first simply by coming up with new innovative ways of charging customers.
For example, you may wish to start charging a new fee to discourage customer behaviours which are particularly cost or resource hungry. This might be the case of a business that relies on online servicing, automation and machine-reading customer data to enable them to operate at scale.
Some customers will insist on a slightly different treatment and this can lead to more face-to-face and manual processes for the company (i.e. higher cost per customer interaction). A specific example of this would be an airline that charges a check-in fee for customers who do this at the customer services counter and not via the online system which the company would prefer.
A few other alternatives would be to implement fees for elements in the customer journey which are provided for free and perhaps assumed to be the cost of doing business. Examples of potential new revenue streams might include:
Free parking outside your shop/venue → Parking fees
Free entry → Entry fee
Keeping an account with us is free → Subject to monthly fee
Closing down an account / leaving contract → Early termination charge
Changing your account details whilst ‘in-contract’ → You guessed it… a fee 😈
What else can you think of that is usually offered for free, but might be a potential option to require a fee payment by the customer?
Raise prices
A price increase is a sensitive and emotive topic because no customer wants to pay more for the same. There might exist a range of perfectly valid reasons why you need to raise prices, or perhaps — the main goal could very well be to increase profitability.
When you are considering a price increase, one of the key factors you need consider is how demand will be impacted. Microeconomic theory will tell us that if the price of a good goes up, demand goes down (there are exceptions, but let’s keep things simple).
The elasticity of your product/service refers to how sensitive demand is to changes in price. For example, petrol would be considered inelastic because consumers have little choice in the short-term but to fill up their tanks at higher prices. In contrast, in the case of coffee (elastic), if the price surges, demand falls quickly as consumers will quickly look for substitutes — switching to tea, bringing their own instant coffee or looking for cheaper coffee shops further afield.
Increasing prices is one of the most effective ways to increase earnings, although it is also likely to trigger negative customer reactions, so brace yourself for potential closures and complaints.
Getting the customer messaging right is difficult in cases like this and if you want to dive deeper into this topic of raising prices, I wrote a more detailed piece of content on this topic which looks at three practical case studies of how a price increase is communicated.
Promotional offers: market, sell, repeat
If you’re going to re-run a marketing campaign, it’s good practice to repeat that campaign via a different channel than the first one you used. For example, if you run an email campaign first to your audience, you might want to follow up with an SMS message to customers who showed some interest but didn’t buy, and as a last step —an outbound phone call to close the deal. This will ensure variety and a better customer experience, executed in a logical hierarchy where the low-cost marketing channels come before the more expensive channels like telephony.
Although if you’re inclined towards the dark side, perhaps this CX stuff is secondary to your commercial objectives. There are companies out there who will repeat the same mailing and messaging over, and over and over again. Why are they doing this? Because it’s a volume-game in their field and repetition can be very effective to drive brand awareness and bringing in sales.
To further improve performance, you may also wish to add in a promotional offer into these campaigns. Naturally, you will want to extend the least generous offer first and in case there is little uptake, re-approach the same customers at a later stage and gradually provide more generous offers until you hit the sweet spot.
Situational (dynamic) pricing
When a company operates dynamic pricing, it means that the price is adjusted based on different factors such as time, geography, customer segment or market conditions.
Dynamic pricing isn’t just about revenue maximisation by increasing prices, but also about effectively managing demand vs supply by adjusting the price according to the specific situation.
Examples of industries where dynamic pricing are used would include online marketplaces, airlines and hospitality. Have you ever noticed how prices go up during peak demand season or when inventory levels are running low?
Dynamic pricing is a sophisticated pricing methodology used by corporations where the use of Data & Analytics plays a key role in modelling different pricing models.
Companies that are running dynamic pricing are tracking demand and adjusting the price accordingly in order to manage inventory, capacity and trying to optimise profits during the demand peaks and throughs.
Eroding existing customer / product benefits
So far, we’ve mostly been talking about improving profitability by increasing revenue, so let’s turn to cutting costs instead by having a look at existing customer benefits.
A word of caution — you need to be really careful here because the perceived value of the product/service benefits is directly linked to customer value, which in turn is going to impact the value the customer generates for the company. In other words, this move can backfire so be very selective about what benefits or features to remove.
Therefore, you might want to run a prioritisation exercise to selectively remove the [relatively speaking] less important product / service features or benefits. Below are some of the hallmarks of what to look for:
low usage by customers
high cost to supply
includes manual processes / non-scalable elements
is not a core / critical element
low perceived customer value
To end this section on a positive note, no one likes to cut back on anything although by force removing existing product benefits, you are setting the bar higher for greater effectiveness and profitability. In other words, you are identifying and keeping the stuff that matters the most, whilst trimming the edges and making your customer proposition leaner.
Final remarks
Everything that we have covered today comes with a big caveat. Just because you can do something, it doesn’t always mean that you should.
The best businesses will know how to maximise customer and commercial performance by striking a healthy balance of Push vs Pull strategies which are opposite, contrary forces.
There is a time and place to use the stick as a customer management tool, and I want to emphasise the importance of deploying the use of such tools in moderation and as an complement to leading with other customer engagement initiatives that are designed to put the customers’ and not the company’s interests first.
Nevertheless, I hope you enjoyed the brief intro into what the dark side of existing customer management has to offer.
Please let me know if you found value in this post by liking or re-stacking the post. You can also share this post with a like-minded friend or subscribe if you haven’t already.
Thanks, and I’ll write to you again soon.
Jens
Brilliant advice about being intentional with your averages in metrics - as an investor who invests every week we definitely make negative decisions around poorly thought thru metrics where cohorts aren't nailed 🌟
Sending returns now has a fee for many online marketplaces