No phone for you! Sprint-Nextel cuts off high-maintenance customers

August 29, 2007

Telecom giant Sprint-Nextel recently decided about a thousand of its customers were just a little bit too demanding, so it went ahead and fired them.


In a move that sent consumer groups into a tizzy, Sprint this summer cut off services to about 1,000 of these troublesome subscribers. These customers may have paid their bills on time, but had to be let go, according to the company, because they just made too many calls to customer support. In the now-infamous letters addressed to the unwanted customers, the company explained simply: "The number of inquiries you have made to us ... has led us to determine that we are unable to meet your current wireless needs."


The remarkable move made headlines nationwide and since has left business analysts to ponder two questions. First, was Sprint justified? Second, is Sprint's bold, controversial move a sign of things to come?


The answer to the first question, say experts from the W. P. Carey School of Business, isn't so easy. As for the second? That's a resounding "Yes."


"I totally disagree with what Sprint did, sending out a mass letter like that," said Stephen Brown, a professor of marketing and executive director of W. P. Carey's Center for Services Leadership. "When you're in a mass market like Sprint is, and you have millions of customers, some of those customers got that letter and will never be customers of Sprint ever again. We can't understand the negative word of mouth generated by that letter."


Then he adds: "But I think we will see more of this, simply because of the increased ability of companies to measure the worth or value of their customers. It's just natural that companies are going to do more things like this."



Nothing new


Brown and his colleagues agree that Sprint's actions -- abruptly cutting off service to 1,000 customers, by U.S. Mail, and offering no assistance in finding those customers new service -- were questionable, to say the least. But they also note that Sprint isn't the first company to unload problem customers, and won't be the last.


In the business-to-business sector, especially, companies from across all industries have been dumping high-maintenance clients for years, and justifiably so. When customers make demands that strain a company's resources to the point where they cut into profits, companies have no choice but to take action. They've done just that for decades.


"A company really can't afford to be carrying customers that are unprofitable, or customers that are taking away from the experience of other customers," says Mary Jo Bitner, a professor of marketing and academic director for the Center for Services Leadership. "If a customer is not profitable in the long term, it really is in the best interest of a company to figure out how to move that customer on."


What's new are technologies that increasingly enable companies like Sprint -- which focuses on a vast consumer segment -- to pinpoint with remarkable accuracy which of its millions of customers are profitable, and which ones are nothing but trouble.


"The technology is what has made this possible," explains Cheryl Burke Jarvis, an assistant professor of marketing at the W. P. Carey School. "Before, companies didn't know which customers were profitable and which ones weren't. There was the adage about 80 percent of profits coming from just 20 percent of your customers, but the question was: Which ones? Now they know exactly which customers are profitable and which ones are eating them alive."


Consumers can only hope that companies will handle them more tactfully than Sprint.



Proceed carefully


And once a company knows which of its customers are chewing up its profits, it may seem a logical to step to go ahead and fire them. Certainly Sprint thought so.


But firing customers is not easy. Even when the deal is done and the offending customers are off the books, there is no guarantee that business will actually get any better, warns Stacey Whitecotton, associate professor of accountancy at the W. P. Carey School.


"Firing a large group of 'unprofitable' customers won't necessarily improve the bottom line." Whitecotton warns. "That will only happen if the company is able to eliminate resources, or find a better use for existing resources. In fact, it is quite possible that firing a large group of unprofitable customers will cause profits to drop, or negatively affect the service to customers you would like to keep. The bottom line is you can't just look at the traditional measures of profitability when you're figuring out whether it's a good idea to fire a customer."


Adds Burke Jarvis: "It's been really popular for consultants to come in and say, 'These 20 percent of customers are costing you money, so let's fire them.' But these people aren't thinking about the long-term customer worth. They're not handling this well."


With that in mind, Whitecotton advises companies to think twice before unloading customers who, on the surface, may appear to be unprofitable. With the right tinkering, she says, they could be made profitable again.


Whitecotton says customers can be problematic in any number of ways. Some are high-maintenance, placing an abnormally high number of calls into customer support. Others make life difficult by, for instance, placing a large number of orders for comparatively small amounts of products. Others may create problems simply by being erratic and unpredictable.


The point is, Whitecotton says, that every customer is different, and so long as they are good, honest customers who pay their bills, companies should attempt to find a way to make them profitable.


"Instead of just saying, 'OK, let's fire them,' a company should ask, 'How do we change the behavior of this customer to make them more profitable?'" Whitecotton says. "It goes back to finding out what the underlying drivers are. If they're requiring a lot of sales support, we have to wean them off that. If they're ordering a lot of non-stock items, maybe you start to keep those items in stock, or charge them extra for ordering non-stock items. You just have to change the way you do business with them."


Burke Jarvis cites Royal Bank of Canada, for instance, as an example of a company that does customer relationship management extremely well. Royal Bank believes that if a customer is "unprofitable," it is up to the bank to change that.


"[Royal Bank of Canada] believes there are no unprofitable customers -- there are only unprofitable products," Burke Jarvis says. "They say, 'It's not the customer's fault, it's ours. So maybe we need to cut costs, or increase fees, or offer different packages.'"



How to do it right


Of course, there may come a time when a company finally must cut ties with truly difficult customers.


And though Brown and Bitner admit there probably isn't an easy way to pull off these firings without some feelings being hurt, they say companies should at least try to be courteous.


Brown expects that's exactly what will happen. When companies in years to come face Sprint's conundrum, he believes, they are likely to employ more sensitive means of canning customers. They may even develop creative ways of keeping them on board, in a way that will make both customers and companies happy.


"Certainly there are more graceful ways of doing this than the way Sprint did it," Brown said. "You can send your customer a nice letter or an email, saying, 'We value you as a customer. But frankly, your heavy use of customer service staff has resulted in the need for us to reassess our relationship with you.'"


Such an approach might open the door for a company to offer problem customers a new level of service. For instance, customers who seem to call customer service more often than others might gain unlimited access to the customer service department -- in exchange, of course, for higher monthly fees. In extreme cases, companies could even capitalize on problem clients, creating new divisions crafted specifically for the kind of problem customers that Sprint may have simply axed.


"You might see companies saying, 'We have all of these customers using our services so much, we really should develop another product and move all of those customers into the new product line, or new company, or a new subsidiary," Brown said. "They could then manage the situation in a way such that the company says, 'We know you want more service, but we need to do this through a different vehicle than our relationship has been to this point. So we have this sister company, and their mantra is to provide high levels of customer service. And this costs x amount of dollars.' So there are some creative ways to keep customers, too."


Then there's one additional option, says Bitner. Companies who don't want to offend customers, but realize they can't serve them profitably within the current arrangement, can simply let customers make the call.


"In the Sprint case, maybe they could have said, 'In order to meet your needs, we'll now need to charge you x amount,'" adds Bitner. "That would let the customer make the decision whether or not they want to leave, or stay and pay the higher service fees."



Bottom Line:

  • Though Sprint-Nextel made headlines with its recent decision to "fire" 1,000 high-maintenance customers, the company isn’t the first to cut off problem customers -- and won’t be the last.
  • New technologies are allowing companies to determine with increasing accuracy which of their customers are profitable, and which ones aren’t. As a result, more customer "firings" are likely in years to come.
  • Companies should think twice, however, before taking that step. Simply getting rid of a customer, experts say, doesn’t ensure an increase in profits, and may actually cost a company money in the long run.
  • Instead of firing customers, companies should try offering them a different product line or a more expensive level of service, thereby keeping their business while also making them more profitable.