|“Every unprofitable customer should get a chance to become a better customer. But some customers will remain unprofitable no matter what steps a company takes to change its cost structure.”|
Even today, the retrospective model prevails. But some insurers are trying to use prospective models. For example, if a company is bidding for the health-insurance business of a law firm, it might analyze data from another law firm and engage in predictive modeling on what it believes its exposure will be, and price coverage based on this analysis.
Once it has the new law firm as an account, the insurance company will try to get more information on individuals so that it can begin to put them into cost-control programs, such as conducting ongoing health assessments or special programs for diabetics. So an insurer, knowing that of the 100 people in the law firm some will contract Type 2 diabetes, can price its premiums accordingly. It can also require that such patients be monitored by their doctors on a regular basis and encouraged to take steps (perhaps a combination of medication, a healthy diet, exercise and weight loss) to mitigate or eliminate the long-term effects of the disease. “ Type 2 diabetes can be managed so that the person does not incur huge costs later in life due to loss of vision or some other problem,” Ahlquist says.
“Monitoring programs such as these are a way to provide incentives for the individuals who are prone to be ill to try to become healthier, and, therefore, more profitable for the insurer. Of course, if there are many unprofitable customers in the account, the insurer can either drop coverage or re-price it.” However, most people covered by employer insurance plans cannot be “fired” by insurance companies because dropping coverage is usually prohibited under terms of the contract with the employer.
Hope Springs Eternal
Convincing businesses that it is sometimes necessary to get rid of customers is not easy. Booz Allen’s Dallas-Feeney, who is co-author with Rosenbleeth of “Capturing Value Through Customer Strategy,” describes how companies strenuously resist any suggestion that some customers have to go.
“It’s a scary notion for companies to think they have to make more money on fewer clients because it means you really have to win their commitment and loyalty to you. It’s a scarier notion to turn clients away than it is to hope against hope that you can make profitable the 500 clients you should get rid of. I call this the ‘hope springs eternal’ way of thinking. The reason salespeople are successful is because they are generally optimistic and don’t want to get rid of customers. And that’s a good thing. But a company can’t afford to let optimism stand in the way of making a tough decision about customers when it’s necessary.”
Wharton’s Fader is skeptical about much of the thinking behind the notion of managing individual customers’ profitability. I think it’s insane to do,” Fader says of the idea of customer management at the individual level. “For one thing, it is hard to diagnose past behavior to understand why people did what they did. Historical behavioral data is rich and interesting, but it has its limits as a guide to the future.” He is especially adamant in doubting the wisdom of firing unprofitable accounts in the business-to-consumer sector, although he does say that managing business-to-business customers is often feasible and worthwhile.