Contact Center Profitability Depends on Customer Profitability

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If you want to know what your contact center and sales personnel are worth, you first should know what your customers are worth.

A lot of companies struggle with the issue of compensation for three reasons. First, they seek to maximize firm profitability, which at first glance motivates them to minimize compensation. At the same time, they must practice strategic behavior management, which is a Harvard-class term that often requires using employee self-interest to maximize income to achieve the greater interests of the firm. Finally, compensation policies must cover both sales and relationship generating activities.

To deal with the contradictory goals and necessary trade-offs, companies usually come up with plans based on a mix of revenue or behavioral goals that supplement a salary base. These plans can be based on behavior (eg., calls handled or customer satisfaction) or sales (products sold or referrals) by the individual, team and/or the company.



But such compensation plans suffer from a fundamental flaw. These plans are developed without knowing the true value of the required behavior or even incoming revenue to the firm.

Undoubtedly, eyebrows are raised. How could anyone not know the value of outbound telemarketing people or a sales force? Aren’t they bringing in revenue or supporting existing customers?

The reason is that companies are measuring the value in terms of outputs or revenue, when they should be measuring it in terms of profitability. Customers vary greatly in terms of profitability, no matter what their revenue is. Until companies know the relative profitability customers, they risk spending money to acquire—and keep—unprofitable customers.

The issue is key. Everyone knows that 20 percent of customers generate 80 percent of profits. What many do not know is that 15 percent of customers, on average, are unprofitable, according to Bain & Co. Unless companies can distinguish between the “good” 20 percent, the “bad” middle group and the “ugly” 15 percent, agents will continue to try to meet the needs of all customers equally, based solely on when they entered the call queue.

What this means in practice is that agents can spend time with unprofitable customers (and generate sterling customer satisfaction scores that will increase their paychecks—and corporate costs) while a profitable customer waits on hold and, potentially, defects for a competitor (reducing corporate profitability). By the same token, sales forces will attempt to capture the short-term sale based on the lowest price instead of the long-term profitable customer seeking value.

To address this problem, companies must follow two strategies. First, they must develop the ability to calculate customer profitability. This involves calculating [link to ID 1381] customer lifetime value, usually by adding up all revenue from a customer or group of customers (discounted by time) and subtracting all costs, including product, sales, contact center and other service costs. This calculation can be complex, depending on the type and accessibility of financial and operational data available, but Sunil Gupt and Donald Lehmann provide a good rule-of-thumb in their excellent book,

Managing Customers as Investments

(Wharton School Publishing, Jan. 19, 2005): “The lifetime value of a customer is simply one to 4.5 times the annual margin of a customer.”

The ability to calculate customer profitability pays off elsewhere. Outbound marketing can better target prospects with profiles similar to those of high-profit customers. Prices can be raised for unprofitable customers to either make them profitable or drive them into the arms of the competition.



The second corporate imperative is to segment service according to customer profitability. Companies, especially in the telephone, credit card and airline industries, already provide varying levels of service through dedicated phone numbers, caller ID-based routing or loyalty program membership. Other companies segment according to the type or amount of service required. For example, Hanley-Wood, a $200-million provider of information for the new construction industry, treats each prospect differently according to whether the person or business is a “window shopper,” researcher, “targeted questioner” or ready to buy.

Such segmentation plays a major role in increasing customer—and contact center—profitability. Here are a few tips to increase profitability using customer value:

  • Know the characteristics of your profitable customers, and tell your sales force to target similar prospects
  • Give high-value customers better service, reducing the risk of attrition and the costs of finding “replacement” customers. Let agents establish personal relationships with high-profit customers, helping to increase retention and brand penetration. Give less profitable customers lower levels of service.
  • Target customer recovery or winback efforts only at the profitable.
  • Segregate—or even “fire”—costly “high-maintenance” customers, especially if their demands increase agent stress and dissatisfaction, contributing to turnover.

Finally, knowing customer profitability can play a role in determining compensation. Sales staff and agent compensation can be partially based on their role in acquiring and/or retaining profitable customers. Give agents incentives to increase customer profitability, not only through cross- or up-selling but also through decreasing customer costs. For example, agents can encourage customers to use the web or other less costly channels or group multiple orders into a single order.



Of course, there are issues associated with moving toward increasing the profitability of contact centers by increasing the profitability of customers. One, of course, is compensation tracking, a common problem today. Another is transitioning from easy-to-measure metrics like call time to important-to-measure benchmarks like retention and relationships. Training will remain important, but it will have to evolve beyond call-handling to problem-solving and consultative sales.

It is one of the paradoxes of business today that the source of all profits and the one competitive advantage that cannot be duplicated—a customer relationship—is so undercut by compensation schemes focused on acquisition instead of retention. Linking compensation to profitability performance will give agents and sales forces the incentive to keep good customers instead of spinning the revolving door of customer churn.

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