How Valuable are Your Worst Customers?

Numismatics_and_Notaphily_iconEverybody who sells cable is used to the fact that some of your customers have a hard time paying their bills. Such customers will get disconnected a few times a year, but since they really want cable they usually come back when they have enough money to pay the disconnect and reconnect fees.

There is another small percentage of your customers who are deal shoppers. They will bounce between you and your competitor and take the latest and best deal they can find. These are the customers who will call and insist on a new deal the day after their special pricing deals ends.

I’ve always wondered about how valuable such customers really are to a cable company. To some degree cable companies spend most of their advertising budget chasing these customers. You have to wonder how valuable that advertising is in a mature market where new installs come mostly from people moving back and forth between competitors.

I have clients who have decided to stop spending big money on advertising, and almost universally they lost customers over time. But that is not automatically a bad thing if what a company loses are the customers who churn, those who don’t pay their bills or customers who chase specials.

There are a few recent examples of bigger companies that have tightened credit policies and who have stopped chasing the marginal customer. Let’s look how that affected them.

The first example is Cablevision. During the most recent quarter they implemented policies that are aimed at getting rid of marginal customers. They significantly tightened credit limits, stopped offering lucrative win-back incentives and eliminated any promotional pricing for customers who pay late. Just during this last quarter these policy changes impacted Cablevision customers and they lost 56,000 video customers, 33,000 voice customers and 23,000 high-speed Internet customers in the quarter.

These losses are significant for Cablevision. They lost 2% of cable customers in just the third quarter while losses for all of 2013 were 2.7%. They lost 1% of both voice and data customers when those customer bases had been growing for the past several years. So clearly the new policies is chasing away customers at a much faster pace than historical and in fact has turned growth of voice and data customers into losses.

The other big company that recently tightened credit policies is DirectTV. They report that they lost 28,000 customers in the third quarter of this year and they attribute most of that to the change in credit policies. To put this into perspective, DirectTV had 20.25 million customers at the end of 2013. But in the fourth quarter of 2013 the company added 93,000 customers compared to the customer loss in this recent quarter.

So it’s clear from these two companies and from the anecdotal evidence that I’ve gotten from my clients that having tight credit policies will shrink growth or even cause a customer loss. But does that mean it’s not worth it?

If most of the advertising budget is spent going after these marginal customers, and if promotional pricing is given to the same small percentage of customers over and over again, does it make sense to spend as much on advertising or to be aggressive with win-back programs? Additionally, my clients tell me that marginal and bad debt customers cause most of the activity and effort in their customer service groups.

Every company is different and there is no right answer for everybody. Cablevision has obviously done the math and their rationale for the change is that it is shedding the customers with the lowest margins that also require the biggest effort to maintain. They think in the long-run that they will end up a little smaller but with a more stable and profitable customer base. That’s a bet they can probably afford to make with over 2 million customers, but it’s a lot riskier for a smaller company to contemplate taking this same position.

But this is food for thought. Every company has customers that cause more effort than they are worth and perhaps every company would be better off with tougher policies. It’s worth asking yourself if you should have win-back programs with huge discounts that try hard to never lose a customer. It’s worth asking if you really are better off keeping customers who don’t pay you three or four time a year.

These are even more important questions for fiber providers to ask. In networks where it costs $1,000 to $2,000 in sunk costs to add a new customer a fiber provider can’t afford too many mistakes. Fiber providers ought to consider having credit checks, required deposits, install fees, term contracts or any other tool that helps to insure that a customer stays long enough to pay for the cost of adding them. Perhaps Cablevision is right and what matters is not that you get every customer possible, but that you get the right customers.

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