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What Would Donald Trump Say To Your Bad Customers?

Well, not all of them of course, but at least the ones that you really don’t want to have. As product mangers we all like to brag both internally and externally about how many customers are using our products. However, the dirty little secret that we don’t share is that all customers are not created equal. In these tough economic times we should finally get around to firing the bad ones…

What Makes A Customer A Bad Customer

Here’s a novel idea: how about if you used your profitable customers to drive more profit to your company’s bottom line? Who could argue with that? Well, there’s a flip side to that coin: get rid of the customers who cost too much to serve.

Dr. Larry Selden of Columbia University has written the book on good customers and bad customers (Angel Customers and Demon Customers: Discover Which is Which and Turbo-Charge Your Stock). What his research has found is that the bottom 20% of customers can drain your product’s profits by 80% while the top 20% can generate 150% of your product’s profit.

Do I have you attention now? It sure looks like this would be a good time to spend some time categorizing your customers. You need to change the way that you do business as a product manager and stop being product-centric and become customer-centric (yeah, yeah — I know that you say that you already are, but you really aren’t). The reality is that you can’t serve every customer at the same level and you’re spending too much time on the bad customers.

How To Find Your Bad Customers

If we are all in agreement that you probably have some customers that should be shown to the door, our next challenge is to find out just exactly which of your customers fit this profile. They like to hide amongst your good customers so they can be tricky to find.

The best way to smoke them out is to categorize your customers. There are lots of different ways to try to do this: demographics, geography, product purchases. However, if you do it this way then you’re not going to find what you are looking for. Your bad customers will still be hiding from you.

Please note that finding your bad customers is not an easy task nor is it quick. You should plan on the process taking upwards of about 6 months to complete. This is how long a well-done customer-profitability analysis takes if you segment your customer results into groups based on customer needs.

In order to do this kind of analysis, you are going to need a lot of data. This data will come from your cost data, individual sales records, and your customer demographics.

Once you’ve completed doing this analysis the right way you can then rank your customers from the least to the most profitable. This is a good start; however, you still need to take it one step further. What you need to do is to then segment your list of customers into groups based on what their needs are. This includes things like buying patterns, behaviors, and other types of information.

How To Fire Your Bad Customers

Once you’ve identified your unprofitable customers, it’s time to deliver the bad news. However, wait a minute. What makes these customers bad customers is that they have bad habits when it comes to buying your products. You need to see if they are willing to change these habits and become good customers.

This means that you’re going to have to sit down with them and have a talk. I suggest that you be frank with them and explain that it just doesn’t make good business sense for you to keep doing business with them like you currently are.

There are lots of small changes that can be made that might change them into good customers. Changing the priority of things that you ship to them. Finding ways to reduce the number of calls that they make to your help desk. You need to include all of these in your discussion with them before you fire them for good.

What All Of This Means For You

The reason that product managers exist is to create and maintain profitable products. In a perfect world, you could focus all of your time and energy on deepening your relationship with your profitable customers. However, there’s one small problem with this: you have some bad customers.

The challenge is in discovering which of your customers are the bad ones. If you take the time to roll up your sleeves and do some digging in the numbers that you already have, you can uncover which of your customers are the bad ones.

Once you’ve identified them, it’s time to sit down and have a talk. If they are willing to change the way that they are doing business with you, then keep them. If not, then it’s time to let them go. Breaking up can be tough to do, but in this case your product’s bottom line will thank you for doing it.

Would your company allow you to fire your bad customers if you could identify them?

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What We’ll Be Talking About Next Time

So there you are: the product manager for a boring product. It turns out that there are other product manager who are responsible for products that are even less cool than yours and they are doing some pretty amazing things to make their products successful…

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Pricing is the moment of truth – all of marketing comes to focus in the pricing decision.

– Raymond Corey, Harvard Business School

Have I ever told you just how much I love pricing? In the world of product management, there are so many talented people that I always felt both jealous and just a little overwhelmed. I mean there are product managers who have an amazing depth of product knowledge, there are product mangers who know their markets inside and out, and of course there are those product managers who know how to get anything that they want done within their company done and done quickly. How the heck was I ever going to measure up to these gods of the field? It took quite sometime; however, I’m pleased to say that I found my niche – pricing.

I discovered pricing somewhat by accident while working for a large European telecommunications equipment provider. Once upon a time, when I had a brief moment to stick my head above the waters of daily product management activities, I realized that none of my peers wanted to touch anything to do with pricing. All pricing related activity was shoved off onto the finance department from which magical prices would reemerge. In a nutshell, nobody had any clue as to why we priced our products where we did. I didn’t take any action on this little nugget of information at the time; however, I started keeping my eyes open.

My next surprise came as I started to get some more insight into how the sales teams were selling the product. The first thing that seemed to go out the door was the list price. After that, it seemed to be a race to see how low we could drop the price in order to get the sale. I was seeing discounts as large as 50-60% on relatively new products. Without knowing any better, I assumed that whatever magic price the folks in finance had set was able to withstand this kind of massive discounting. It turns out that I was wrong.

Collectively as Product Managers, we spend our time on capturing a larger share of the market all the while increasing customer satisfaction. We’ve been taught that if we can do these things, then somehow big profits will somehow magically follow. Unfortunately, there never seems to be enough profit magic to go around in the world these days…

Most firms didn’t worry all that much about pricing in the past. As long as you knew how much a product cost to make, then you could tack a generous profit margin on top of that and you were set. However, this all changed in the 1980′s. This is when the long established market leaders started to get their clocks cleaned by new startups that didn’t seem to care about market share. Instead, these new competitors specifically targeted the larger firms most profitable customers (known in the biz as “cream skimming“). This was followed by a wave of companies being taken private, having their product prices raised even as market share dropped and yet still starting to rake in huge profits.

Just as a final confirmation of the importance of pricing and making a profit, need I remind you of the dot.com era? All those new companies went on a footrace to try to build the largest market share, profits be dammed. Ooops, when it all ended the quickest runners went bankrupt while the few that had actually still focused on profits were the last men standing.

I finally had a chance to sit down and talk with some of my friends in the finance department over lunch and I asked about the the magical process that they went through to set prices. You can imaging my surprise when I found out that all they were doing was taking the cost of the product, adding the current “company overhead” margin, and then adding a 35% profit margin on top of that with the expectation that it would be discounted no more than 10%. Ouch – talk about simplistic pricing! My friends pointed out to me that the company was more concerned about growing revenue than profits at this time and so that was why I was seeing some fantastic discounts being approved.

Needless to say, this was sorta like discovering that Santa wasn’t coming this year. The secret pricing knowledge that I thought that Finance had really wasn’t there – the emperor had no clothes! I spent much time after this focusing on learning as much about pricing as I could and that information has served me well over the years. In future posts, I’ll share my secrets so that you too can become a master of product pricing.

Do you set the prices for your products or is it handed off to another department to do? Does your company use a sophisticated pricing strategy or do you basically set it and forget it? Is company profitability something that you are under pressure to increase you product’s contribution to? Leave a comment and let me know what you think.

Tags: product manager, pricing, profit, revenue, new product development

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