Serving Customers in the Downturn

Smart companies will continue to spend on their best, high-margin customers. It'll help boost profits, improve retention, and offer a chance to poach from penny-pinching rivals

By Harold L. Sirkin

Companies everywhere have reacted to the recession by lowering revenue projections and tightening their belts: delaying purchases, canceling nonessential travel, reducing payroll, freezing or shrinking the R&D budget, closing underperforming operations, slowing production, trimming inventories, reducing perks. And such actions are usually necessary and appropriate in hard times.

But executives also can overdo the cost-cutting, compromising one of their most valuable assets: their relationship with their best customers. Key relationships must continue to be nurtured and grown. The tough times will end. If a company's best customers jump ship during the downturn, the company may never win them back.

This is a universal truth that applies to virtually all businesses, in any country. Customer service, in both good times and bad, is the great intangible that can make or break a business. When others are cutting in this area, the wise executive will consider spending.

One Size Doesn't Fit All

In recessions, as we all know, many customers base their purchasing decisions solely on price. But others, even during a recession, want more than just the lowest possible price. They demand service and they're willing to pay a premium for it, and these "high yield" customers are typically a company's most profitable. When you cut the service of price-sensitive buyers, you may not lose their business. But when you cut the services you offer to high-yield customers, you may not only lose the yield but the customer as well. Worse, you may lose this customer to your competitor, who might use the enhanced margin to capture even more of your customers.

In a crisis, of course, it's common to seek simple one-size-fits-all solutions, such as cutting costs across the board on the theory that "all customers want is a low price." And if you're in a pure commodity business, that might be the right approach. But most companies don't sell pure commodities. They sell industrial goods, information, technology, consumer goods and services.

Consider the travel and tourism industry.

When you pay business fare for a flight on a scheduled airline, you may pay as much as 10 times more for your ticket than the lowest-paying passenger on the same flight. The profitability of virtually every flight for the major airlines is directly related to the number of high-fare passengers on the plane. It's easy to fill planes—just cut the price—but it's much harder to make money. Typically, 2% to 3% of an airline's total customers account for approximately 25% of its revenues, mostly because they are paying far more than other passengers.

Given the poor economics of the major airlines, it's easy to see why they would focus on cutting costs. But when they cut services to their high-yield customers so they can reduce their own costs they are, in essence, needlessly commoditizing their own product. And as major carriers, with substantially higher costs than competitors such as Virgin America and Jet Blue (JBLU), they are putting themselves into a death spiral—something no company should or can afford to do.

United Targets High-Yield Fliers

Some airlines understand this and have found ways to provide enhanced service to high-yield customers. It's easy for the airlines to identify their most profitable customers from their existing databases. From their frequent-flier programs, they can identify customers who board the most flights during a given period of time or log the most miles. From the record of ticket sales, they know how much each customer pays for each flight. Combine the two databases and they can identify customers who fly often at high prices.

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