Unprofitable Customers Research Articles

Marketing segmentation of banks’ corporate clients based on data mining technique

In recent years, the banking services market has been developing dynamically, experiencing a sharp increase in competition. Banks that provide maximum profitability for each client gain the most significant competitive advantage. The sales model in corporate banking is associated with personal interaction between bank employees and business owners, and the subsequent establishment of individual service conditions. However, this approach is often ineffective when a bank faces the issue of maximising the efficiency of business activities. This study aims to segment a bank’s corporate client base and develop a pricing strategy for each of the groups that have been singled out in the process. The study sample consisted of 4,500 corporate clients of a Ukrainian bank who were active users of euro accounts. The k-means data mining algorithm was used to develop marketing segments. The optimal number of clusters was determined by weighing the results of calculating 26 indices from the NbClust package and the bank’s business requirements. Six similarity groups were found during the calculation of the algorithm. The study found that clusters 1 and 2 were a concentration of unprofitable customers for whom an introduction of a service fee was urgently needed. Marketing segments 3 and 4 were customers who did not record net losses but with whom it was deemed necessary to work to improve their profitability. The remaining segments were ‘healthy’ users of euro accounts. With regard to these customers, it was recommended no additional service fees should be imposed. The proposed methodology makes it possible for a bank to remain attractive in a competitive environment while not incurring unnecessary costs.

Management of Customer Lifetime Value in Organizations

Companies should focus on customer lifetime value, its management, and on profitable customers for company growth. The objective of the study is to analyze customer lifetime value and to manage it effectively. The methodology adopted is a conceptual analysis of various aspects of customer lifetime value and its management. Companies should appreciate the importance of customer lifetime value and the connections among customer lifetime value, brand equity, and customer equity. They should develop and build customer lifetime value through various measures (viz., improvement in customer services, customer engagement, enhancing the growth potential of customers, management of unprofitable customers, rewarding profitable customers, and developing customer touch points). They should develop customer loyalty through trust and measure customer lifetime value. Academicians may suggest models that are effective in measuring customer lifetime value and identifying profitable customers. Managers may suggest effective strategies and initiatives for better management of customer lifetime value.

Shifts in Customer Relationship

Companies require building and maintaining customer relationships to achieve excellence in the digital age. Companies should be selective and should develop relationships with loyal and profitable customers and discourage unprofitable customers to continue doing business with them. Companies require developing interactive customer relationships which are mutually beneficial and understanding the growing importance of consumer-generated marketing in the digital age and online marketing domains in forming relationships. They should respect public policies like consumer security and privacy, have knowledge of customer rights, and respect those rights to win customer trust. Firms require developing customer preference programs to strengthen the bondage with passionate customers and to attract potential buyers and convert them into regular customers. All such strategies will help companies understand the shifting nature of customer relationships in the digital age, build in-depth customer relationships, succeed in the tough environment, and achieve business excellence in the digital age.

Shifts in Customer Relationship

Companies require building and maintaining customer relationships to achieve excellence in the digital age. Companies should be selective and should develop relationships with loyal and profitable customers and discourage unprofitable customers to continue doing business with them. Companies require developing interactive customer relationships which are mutually beneficial and understanding the growing importance of consumer-generated marketing in the digital age and online marketing domains in forming relationships. They should respect public policies like consumer security and privacy, have knowledge of customer rights, and respect those rights to win customer trust. Firms require developing customer preference programs to strengthen the bondage with passionate customers and to attract potential buyers and convert them into regular customers. All such strategies will help companies understand the shifting nature of customer relationships in the digital age, build in-depth customer relationships, succeed in the tough environment, and achieve business excellence in the digital age.

Profitable Retail Customer Identification Based on a Combined Prediction Strategy of Customer Lifetime Value

As a fundamental concept of customer relationship management, customer lifetime value (CLV) serves as a crucial metric to identify profitable retail customers. Various methods are available to predict CLV in different contexts. With the development of consumer big data, modern statistics and machine learning algorithms have been gradually adopted in CLV modeling. We introduce two machine learning algorithms—the gradient boosting decision tree (GBDT) and the random forest (RF)—in retail customer CLV modeling and compare their predictive performance with two classical models—the Pareto/NBD (HB) and the Pareto/GGG. To ensure CLV prediction and customer identification robustness, we combined the predictions of the four models to determine which customers are the most—or least—profitable. Using 43 weeks of customer transaction data from a large retailer in China, we predicted customer value in the future 20 weeks. The results show that the predictive performance of GBDT and RF is generally better than that of the Pareto/NBD (HB) and Pareto/GGG models. Because the predictions are not entirely consistent, we combine them to identify profitable and unprofitable customers.

Changing nature of customer relationships: strategies and initiatives to beat the competition

Companies require developing and maintaining customer relationships to remain ahead in the competition. Companies should develop long-term relationships with profitable and loyal customers and even discourage unprofitable customers to continue remaining with them. Companies should develop interactive relationships which are mutually beneficial and acknowledge the growing importance of consumer-generated marketing and customer relationships in online marketing domains. They should be aware of consumer rights and respect those rights to win customer trust. Firms require developing customer preference programs to strengthen the bondage with their passionate and profitable customers and also to attract potential customers in a cost-effective manner. All such strategies will help companies to understand the changing nature of customer relationships, build long-term customer relationships, gain competitive advantage, and grow in the tough business environment.

Why do banks retain unprofitable customers? A customer lifetime value real options approach

This article investigates why banks maintain unprofitable customers by applying real options theory to determine their customer lifetime value (CLV) and assessing threshold values above which it is economically desirable to abandon those customers. The proposed valuation method is designed to enable a better understanding of the appraisal process, ensure greater transparency and account for the incremental value added by reputation as a summary of positive perceptions and recommendations about a brand. Using data on customers of a Spanish leading retail bank, the results show that banks act according to real options theory in their decisions to maintain apparently unprofitable customers, that optimal divesting points exist and that the incremental value of reputation may be isolated. The proposed methodology can help better elucidate banks’ decisions on customer management.

The Detrimental Effect of Customer Demotion on Customer Profitability in Hierarchical Loyalty Programs

Firms employing hierarchical loyalty programs (HLPs) periodically demote customers from higher to lower status level to divest from unprofitable customers and boost profitability. However, existing literature lacks objective evidence on how customer demotion affects demoted customers’ future purchase behaviors and ultimately profitability for the firm. Moreover, customers in the HLP’s higher position may respond to customer demotion differently from those in the HLP’s lower position. Drawing upon emotions and equity theories, this study quantifies how the profits that customers contribute to the firm change after customer demotion, and compares demoted customers’ behavioral reactions from top-tier with those from bottom-tier based on customers’ actual behavior data from a major retail bank in South Korea. The findings show that withdrawing customer status actually deteriorates customer profitability, and customers with top-tier status decrease their profitability more dramatically than those with bottom-tier status after demotion. The results contribute to previous literature on customer demotion and relationship marketing, and provide specific guidelines into how firms should design and implement customer demotion in HLPs.

The Detrimental Effect of Customer Demotion on Customer Profitability in Hierarchical Loyalty Programs

Firms employing hierarchical loyalty programs (HLPs) periodically demote customers from higher to lower status level to divest from unprofitable customers and boost profitability. However, existing literature lacks objective evidence on how customer demotion affects demoted customers’ future purchase behaviors and ultimately profitability for the firm. Moreover, customers in the HLP’s higher position may respond to customer demotion differently from those in the HLP’s lower position. Drawing upon emotions and equity theories, this study quantifies how the profits that customers contribute to the firm change after customer demotion, and compares demoted customers’ behavioral reactions from top-tier with those from bottom-tier based on customers’ actual behavior data from a major retail bank in South Korea. The findings show that withdrawing customer status actually deteriorates customer profitability, and customers with top-tier status decrease their profitability more dramatically than those with bottom-tier status after demotion. The results contribute to previous literature on customer demotion and relationship marketing, and provide specific guidelines into how firms should design and implement customer demotion in HLPs.

УПРАВЉАЊЕ ЖАЛБАМА КУПАЦА У ТУРИСТИЧКИМ АГЕНЦИЈАМА

The process of managing customer complaints in tourism companies is a significant prerequisite for improving customer relationships and increasing the level of customer satisfaction and loyalty. Companies in tourism tend to reduce the number of dissatisfied and unprofitable customers. The subject of research in the paper is the analysis of the influence of certain factors on the tendency of customers to appeal to tourist agencies and, consequently, to their loyalty.The aim of the research is to examine whether and to what extent the sociodemographic characteristics influence the decision of the customers to file complaints with the agency in case of dissatisfaction with the service. Particular emphasis is on the analysis of the influence of certain relational factors (such as the level of customer confidence, image of the agency and the effectiveness of the complaint management process) on the tendency of customers to appeal and to increasing their satisfaction and loyalty to a particular agency. The importance of research is also in providing guidance to both tourist agencies and other companies in the field of tourism, improving customer relationships and improving the quality of the service process through effective customer complaint management.

The impact of unprofitable customer management strategies on shareholder value

A significant proportion of many firms’ customers are unprofitable. The question of how unprofitable customers should be managed has recently received increasing research attention from the customer and manager angles, but the effects of unprofitable customer management (UCM) strategies on shareholder value is unknown. Using an event study methodology, we examine stock market reactions to disclosures of firms’ UCM strategy decisions. Results from a sample of UCM strategy disclosure events reveal an average short-term abnormal stock return of −0.53%. Drawing on signaling theory logic, we explore a number of signal (UCM strategy), signaler (firm engaging in UCM), and signaling environment characteristics that may affect the shareholder value effects of firms’ UCM approaches. Our analyses show that investors respond more favorably to indirect UCM strategies than to direct customer divestment strategies. We also find that particular types of indirect UCM strategy approaches and strategic intent in UCM strategy adoption, stronger firm marketing capabilities and, and positive publicity can help mitigate the generally negative abnormal stock returns observed. Overall, our findings have important implications for marketing theory and provide actionable new insights for managers into how to approach the management of unprofitable customers.

Targeting and salesforce compensation: When sales spill over to unprofitable customers

Targeting selling efforts towards profitable customers is widely known to increase sales and allow firms to charge higher prices. In this paper, we show that targeting of selling efforts may also inadvertently lead to sales spilling over to unprofitable customers when they are not identifiable. Such spillover sales are more likely when the ability of the salesperson and the profitability of target customers are above a threshold. We also show that firms can solve this problem by lowering the sales incentives as well as the price to make their offer unattractive to the unprofitable customers, a strategy commonly referred as screening. When the ability and profitability are both very high, however, the firm is better off allowing sales to unprofitable customers because the cost of preventing sales from spilling over is excessive. This is because the reduction in profits from the target customers that results under screening exceeds the loss from allowing sales to unprofitable customers. Such an accommodation strategy becomes more attractive as the fraction of unprofitable customers in the market decreases. Finally, we show that the spillover problem is even more acute when firms can monitor the selling efforts of a salesperson.

Improving service responsiveness and delivery efficiency of retail networks

PurposeThe purpose of this paper is to explore how a retail distribution network can be rationalised from a spatial perspective to improve service responsiveness and delivery efficiency.Design/methodology/approachThis paper applies spatial analytics to examine variability of demand, both spatially and from a service delivery perspective, for an auto-parts retail network. Spatial analytics are applied to map the location of stores and customers to represent demand and service delivery patterns and to delineate market areas.FindingsResults show significant spatial clustering in customer demand; whilst the delivery of products to customers, in contrast, is spatially dispersed. There is a substantial gap between revenue generated and costs. Market area analysis shows significant overlap, whereby stores compete with each other for business. In total, 80 per cent of customers can be reached within a 15-minute-radius, whilst only 20 per cent lies outside the market areas. Segmentation analysis of customers, based on service delivery, also shows the prevalence of the Pareto principle or 80:20 rule whereby 80 per cent of the revenue is generated by 20 per cent of customers.Practical implicationsSpatially integrated strategies are suggested to improve the efficiency of the retail network. It is recommended that less accessible and unprofitable customers could be either charged extra delivery cost or outsourced without the risk of a substantial reduction in revenue or quality of service delivery.Originality/valueInnovative application of spatial analytics is used to analyse and visualise unit-record sales data to generate practical solutions to improve retail network responsiveness and operational efficiency.

The ugly side of customer management – Consumer reactions to firm-initiated contract terminations

Many firms apply “customer demarketing” strategies and dismiss unprofitable customers. However, empirical research on the consequences of dismissing customers is scarce. We address this research gap and develop and empirically analyze a theoretical framework of consumer reactions to customer demarketing based on the theory of dual entitlement. We conduct seven experiments in which we identify the main effect of observing customer demarketing and analyze several moderating and mediating factors. In addition, we use a field study to illustrate the consequences of experiencing a contract termination in a real-world setting, in which a firm terminated contracts for >10.000 customers. The results show that consumers disapprove of customer demarketing, regardless of whether they experience it themselves or only observe it, regardless of the responsibility for the cause of the contract termination, and regardless of the social proximity to the dismissed customers. The effect is, however, somewhat weaker if customer demarketing is perceived to be a common occurrence, if alternative offers are made, and if the financial cause is framed as a loss. Furthermore, firms can dampen the negative effect of customer demarketing by offering substantial monetary compensation to dismissed customers. We identify perceived fairness of the firm's behavior as the underlying process that causes the negative effects of customer demarketing, and this also holds when we control for potential alternative mediators (i.e., warmth and competence perceptions).

The Impact of Unprofitable Customer Abandonment on Current Customers’ Exit, Voice, and Loyalty Intentions: An Empirical Analysis

To manage relationships of unprofitable customer and mainly divesting is the area has receiving growing attention between researchers and practitioners over the past few years. The aim of paper is to explore the influence of abandonment of unprofitable customer on existing customers of abandoning firm, specially their exit voice and loyalty intentions. For the first time this study examines that how current customer that a company want to keep along reacts towards termination of unprofitable customer’s relationship. As a result, insights have been provided with regard to cost associated with the abandonment of unprofitable customer relationship a problem that has not been the focus of any empirical study nowadays. This is mainly an empirical study and a scale was settled to know the influence of constructs comprising; relational and structural constraints on exit, voice and loyalty intentions. The survey was circulated among the participants based on convenience sampling. Data were analyzed using correlation and regression analysis to assess the impact of abandonment of unprofitable customer on existing ones of abandoning firm. Study show that existing customers are more inclined and actively respond to abandonment of unprofitable customer in terms of exit/voice than passively through loyalty silence. Moreover, this indicates that current customers are less likely to limit the potential negative consequences, abandon unprofitable customer switching costs increase or satisfied.

Custo para servir clientes: uma pesquisa-ação em administração condominial na Baixada Santista (SP)

Most companies providing services has no tools to measure all the costs of their service and profitability of each customer. This study aims to verify the use of the Cost to Serve Method contributes as analysis of customer profitability in service delivery tool. Through an action research conducted in one of the largest companies in the Condominium Administration sector in the city of Sao Vicente (SP), was applied the methodology Cost to Serve, thereby seeking to measure the cost of serve each client and determine their profitability. Noted the absence in measuring Cost to Serve customers of the company object of study and that can be a reality for other service companies. The company charged the same price to all 55 customers, per unit of apartments in each condominium, but had no idea of the costs to serve them. With the application of the methodology Cost to Serve, were identified 60 % of profitable customers and 40 % unprofitable as well as measured participation in the overall profitability of the company. The company may use the information obtained as a tool for decision making related to improvement in processes for delivery of services to customers, review of prices charged for customers, and even, as a last option, the possible exemption of unprofitable customers, focusing on improvement of the profitability of the company as a whole. The methodology Cost to Serve is a useful tool for the analysis of profitability of the Services sector.

The effects of customer relationship management relational information processes on customer-based performance

This study investigated the influence of the completeness of CRM relational information processes on customer-based relational performance and profit performance. In addition, interaction orientation and CRM readiness were adopted as moderators on the relationship between CRM relational information processes and customer-based performance. Both qualitative and quantitative approaches were applied in this study. The results revealed that the completeness of CRM relational information processes facilitates customer-based relational performance (i.e., customer satisfaction, and positive WOM), and in turn enhances profit performance (i.e., efficiency with regard to identifying, acquiring and retaining, and converting unprofitable customers to profitable ones). The alternative model demonstrated that both interaction orientation and CRM readiness play a mediating role in the relationship between information processes and relational performance. Managers should strengthen the completeness and smoothness of CRM information processes, should increase the level of interactional orientation with customers and should maintain firm CRM readiness to service their customers. The implications of this research and suggestions for managers were also discussed.

The Strategic Value of High-Cost Customers

Many firms today manage their existing customers differentially based on profit potential, providing fewer incentives to less profitable customers and firing unprofitable customers. Although researchers and industry experts advocate this practice, results have been mixed. We examine this practice explicitly accounting for competition and find that some conventional prescriptions may not always hold. We analyze a setting where customers differ in their cost to serve. We find that when a firm can discriminate among its customers but the rival cannot, customer base composition influences the rival's poaching behavior. Consequently, even though a low-cost customer is more profitable when viewed in isolation, a high-cost customer may be strategically more valuable by discouraging poaching. Therefore, contrary to conventional advice, it can be profitable for a firm to retain unprofitable customers. Moreover, some customers may become more valuable to retain and receive better incentives when they are less profitable. We further show that, in competitive settings, traditional customer lifetime value metrics may lead to poor retention decisions because they do not account for the competitive externality that actions toward some customers impose on the cash flows from other customers. Our results suggest that firms may need to evolve from a segmentation mindset, which views each customer in isolation, to a customer portfolio mindset, which recognizes that the value of different customers is interlinked. This paper was accepted by J. Miguel Villas-Boas, marketing.

How to Deal with Unprofitable Customers? A Salesforce Compensation Perspective

We show that prices and incentives recommended by the salesforce literature when targeting a profitable segment can attract unprofitable customers, particularly when salespeople have high productivity and low risk (i.e., risk aversion times uncertainty). Therefore, when customers are unidentifiable, unprofitable customers may also enter the market creating an adverse selection problem for the salespeople. By solving the moral hazard and adverse selection problems simultaneously, we show that firms can prevent the entry of unprofitable customers by “screening”. Although, screening generally requires a higher price to dissuade unprofitable customers, when firms hire salespeople, however, it requires lowering of both selling effort and the price. It also leads to a “sales trap” restricting the sales to the profitable segment to a fixed level. Screening, therefore, lowers firm profits obtained from the profitable customers. When salespeople are highly productive and risk tolerant, this drop in profit can be so high that “accommodating” unprofitable customers becomes the preferred strategy. Furthermore, the adverse selection problem intensifies and accommodation becomes more preferable when there is no moral hazard between firm and the salesperson. Behavior of unprofitable customers, therefore, must be an important consideration when targeting high-value customers and designing salesforce compensation.

Antecedents and consequences of sales representatives' relationship termination competence

Purpose – Most firms have a number of unprofitable customer relationships that drain the firms' resources. However, firms in general and sales representatives in particular hesitate to address this problem and, ultimately, to terminate business relationships. This paper therefore aims to investigate the antecedents and consequences of sales representatives' relationship termination competence. Design/methodology/approach – A model of antecedents of sales representatives' relationship termination competence is developed and tested using a cross-sectional survey of more than 800 sales representatives. The impact of the constructs “termination acceptance”, “definition of non-customer”, “termination routines” and “termination incentives” on termination competence are analyzed using PLS. Findings – A sales representative's termination competence is positively influenced by greater clarity and wider dissemination of the definition of a “non-customer”, higher prevalence of termination routines, and increasing degrees of termination incentives. Acceptance of relationship termination at the firm level does not appear to have a significant impact on sales representatives' relationship termination competence. In addition, termination competence significantly affects the value of customer portfolios. Practical implications – The findings suggest that managers should more actively consider relationship termination as a legitimate option in customer relationship management. In order to increase the value of a firm's customer portfolio, managers must not only provide a clear definition of the types of customers the organization does not want to serve, but must also implement termination routines within the organization. Managers also need to establish incentives for sales representatives to terminate relationships with unprofitable customers. Originality/value – This paper contributes to the currently scarce research on relationship termination by documenting results from a large-scale analysis of relationship termination.