How do you “fire” your most unprofitable customers? American Express is offering a$300 prepaid American Express gift card to entice select cardholders to pick up their marbles and go home. Cardholders with high balances and little to no spending or payment activity have been identified as high risks, particularly now as card issuers prepare to deal with increasing defaults.
I’ve written in the past that not all customers are created equal. One research study found that 20% of customers created 220% of profits, and Booz Allen Hamilton suggests that as many as 25% of your customers may actually be destroying value.
In the case of AmEx, customers that don’t use the cards aren’t generating value in that they aren’t incurring fees and therefore aren’t generating revenue for AmEx. This alone wouldn’t be so bad and might be tolerated in better times. Promotions might be created to entice the low-value customer to dust off the card and use it more frequently.
However, cardholders with large balances may be an increasingly significant liability in these economic times. AmEx is choosing to spend $300 to entice them to pay off their balances and leave in lieu of significantly more they may have to write down at a later date if the cardholder goes bankrupt.
One of my clients did a basic analysis of the cost to serve of a number of his clients and found that a number of them were abusing the call center. One client called technical support 37 times in one day! While this may be indicative of other product and service deficiencies that warrant so many calls to technical support, it is clear that very few support plans can provide a profit when subjected to 37 calls per day. He was horrified to find that so many of his customers were consuming huge resources–destroying his profitability in ways he never imagined.
As part of your customer strategy, you need to model customer value and include measures of profitability so you know which customers to pay more attention to. Some of your bottom-tier customers could perhaps be migrated into at least a neutral tier. Those that can’t should be shed. Run the numbers. You may find that your profits rise dramatically simply by firing a few customers.