There’s Still Profit Potential in Your Low-Profit Customers

In most companies, the long tail of profit desert customers — small, low-profit customers often numbering in the tens of thousands — has surprisingly important latent profit opportunities. The key to success is clustering these customers into segments by profitability and development potential, then crafting an appropriate management plan for each segment.

Profit desert customers are an important business segment in most companies. They often amount to about 50–80% of customers and consume about 40–60% of the company’s costs. In some companies, they’re assigned to territory reps as low-revenue “C” accounts, which distracts the reps from selling more lucrative business. In all companies, they create costly complexity in functions ranging from order-taking to fulfilment to after-sales service and returns because these customers are numerous and often inexperienced.

The best way to manage your profit desert customers is to cluster them under a unified management structure — a profit desert customer team — rather than having them scattered in sales reps’ portfolios throughout the company. This team should be composed of specialized sales and marketing managers who are solely focused on this customer segment. These managers should oversee all of the following steps of the profit desert customer management process.

Micro-target your profit desert

Enterprise profit management, which utilizes transaction-level profit analytics, provides the basis for micro-segmenting your profit deserts and creating a management plan that fits each segment. We’ve described these transaction-level profit metrics in previous HBR articles. When companies use these metrics (creating an all-in P&L for every invoice line), they quickly see that their customers fall into three broad profit segments:

• Profit peaks — Their high-revenue, high-profit customers (typically about 20% of the customers that generate 150% of their profits)
• Profit drains — Their high-revenue, low-profit/loss customers (typically about 30% of the customers that erode about 50% of these profits)
• Profit deserts — Their low-revenue, low-profit customers that produce minimal profit

While the profit desert customers, in aggregate, produce minimal profits, a close analysis shows that some segments of these customers are in fact important profit contributors, while other segments are significant profit drains. Although individual customers make only tiny profit contributions or cause only tiny losses, there are so many customers in each segment that the total impact is significant. With micro-targeting and digital systems capabilities, these profit desert customer segments are very manageable. However, they require a much different approach to management than the larger and fewer profit peak and profit drain customers.

The following figure profiles a typical company’s profit peak and profit desert customers. Each category is divided into profit-based quartiles (ordered by net profits in descending order, with an equal number of customers in each quartile).

Each profit peak customer quartile has about 2,800 customers, and together, these high-profit customers produce $189 million in net profits. In contrast, each profit desert quartile has about 62,000 customers, and in aggregate, the profit desert customers produce $25 million in net profits.

While the profit peak customers produce $5,000 to $44,000 in profits per customer, the profit desert customers produce profits per customer ranging from $900 to losses of $600.

There are stark profitability differences among the profit desert quartiles:

• The top profit desert quartile produces a strong $58 million in profits, with a mere $900 in profits per customer.
• The upper quartile produces only $5 million in profits, with an inconsequential amount per customer.
• The lower quartile produces a loss of $1 million, with an inconsequential amount per customer.
• The bottom quartile causes $37 million in losses, with a mere $600 loss per customer.

This figure shows that 1) the profit desert customers require a much lower-cost business model than the profit peak customers (or profit drain customers) due to their small size, and 2) given the large differences in profit performance among the profit desert quartiles, the business model needs to be even more differentiated. These are the two cornerstone components of mining the latent profit in your profit deserts. 

Differentiate your business model 

The most important way to differentiate the business model for your profit desert customers is to focus your digital transformation initiatives on this group. It’s imperative to have a website with electronic ordering, but it’s not enough. It’s critical to automate the entire profit desert customer purchasing cycle.

Effective profit desert customer portals have a comprehensive set of capabilities, including:

• Pricing and promotions — Pricing and promotional capabilities that can be micro-targeted to the customers in specific profit desert quartiles.
• Product search — A catalogue with sophisticated search capabilities and alternative stock keeping units (SKU)s within a product (e.g., 12 brands of wrap-around safety glasses), shown in descending order by their net profitability.
• Product selection — Customer reviews, along with Q&As populated by customers and the company.
• Product ordering — Intuitive, easy-to-use e-commerce capabilities supplemented by upsell and cross-sell suggestions generated by machine learning algorithms. When a product is unavailable or on backorder, it should offer suggestions for substitutes.
• Product tracking — Notifications or posting of product shipment progress.
• Returns management — System that analyzes whether to have the customer send the product back or keep it. The company should also monitor the volume and nature of returns to identify both customers abusing the return policy and systematic deficiencies in the selling or product support process (e.g., faulty instructions).

Target your profit improvement measures

Each profit desert quartile is different from the others, and each needs a distinct program of profitability improvement.

Top quartile profit desert accounts

This group of customers is significantly profitable in aggregate, but it is not economical to engage each customer individually. The first step is to profile each customer in order to prospect for candidates you can develop into profit peaks. The prime candidates are small companies that are growing fast, and large companies where you make up a small portion of spending.

Once you’ve identified these prime prospects, you can probe their buyer behavior by sending them surveys or inquiring through telesales calls. One particularly astute distributor used follow-up calls to classify its development prospects by whether they were primarily seeking:

• Low prices
• Broad assortments
• Fast service
• Technical support

In the initial call, the telesales rep confirmed the account’s potential and gauged its likely buyer behavior. The account was then moved to an “onboarding” telesales team specializing in one or another of the buyer behavior categories.

Similarly, you can use surveys to profile the buyer behavior of the remaining accounts in the top quartile of your profit desert customers and build a set of targeted marketing programs based on their buyer behavior categories.

In addition, the profit desert customer team should constantly be in touch with a select sample of top quartile customers to probe for opportunities to create product modifications and extended products (a set of products and services that meet a specific customer need). For example, an auto parts company found that repair shops installing its brakes needed instructions tailored to the make and model of the car. They added a section to their website with this information, and sales skyrocketed.

Once the customer team has developed profiles of the top profit desert customers, it can use them as the basis for prospecting for new top accounts. For example, one savvy retailer determined that its most profitable customers were referred by friends and family. The company built a successful marketing program around this, featuring events like evening friends and family wine and cheese parties.

Bottom quartile profit desert accounts 

The objective of managing these customers is to restore them to at least minimal profitability, or decline to continue to do business with them (by charging a compensatory price).

One major distributor was shocked to find that the company’s new transaction-level profit metrics showed that over 80% of its customers were profit deserts, and a high proportion of these were bottom quartile profit desert accounts.

The company tightened its policies for the bottom quartile through several measures:

• Absolutely no discounting or couponing
• Minimum order size to avoid add-on charges
• No free shipping (the company had offered free shipping for large customers to match a competitor, and simply applied the policy to bottom quartile profit desert accounts as well)
• No free ancillary services (e.g., expediting)
• A restocking fee for returns

The company also lengthened its order cycle time for these customers so it could source from a replenishment warehouse if the local distribution center was low on stock.

Sales reps were allowed to override these restrictions, but the company carefully tracked these overrides and held the reps accountable for excessive overrides. (Note that these measures were modified for the top quartile customers that were development/growth prospects.)

In this process, it’s important to consider the lifetime value of the account. For example, a customer like a job-shop manufacturer may have legitimately sporadic needs. A customer may even be a profit peak for a few years when it has a particular project, then the next year be between projects with only minimal purchases (and return to profit peak status following that). It is reasonable for the customer to expect that the “extras” it received in its profit peak years would be extended during its year of minimal purchases, and this should be accommodated.

Upper and lower quartile profit desert customers 

These customers consume a significant amount of resources and produce only minimal profits, if any.

The first priority is to probe these customers to identify any that have the potential to grow into a profit peak account, either through internal growth or increased spending with you. These customers should be included in the high-potential top quartile customer development program.

Upper and lower quartile profit desert customers are good candidates for using machine learning algorithms to search out upsell and cross-sell opportunities. However, you should supplement this with measures similar to the bottom quartile program described above to tighten up the cost to serve.

It is important that the profit desert management team continually probe these customers through surveys, email, or calls to discover whether there are new or emerging needs or innovations that you could profitably meet.

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Profit desert customers are numerous and diverse, yet they have important latent profits to contribute. The key to success is to deploy a dedicated, multicapability profit desert management team that uses enterprise profit management metrics to micro-target the best profit opportunities, and create highly focused programs that bring your latent profits to your bottom line.