As service managers, we want to conclude as many long-term contracts as possible with our customers. But growth at any price cannot be the goal. So how do we deal with unprofitable contracts?
Appropriate controlling is needed to ensure profitability in the After-Sales to keep an eye on. In this way, contracts that are sustainably uneconomical can be identified. If only one in a hundred contracts slips slightly into negative territory, this is by no means a disaster. However, if the rate is between 30 and 50%, there is obviously something wrong with your pricing. You need to take action here.
For this we recommend 2 different strategiesapart from a price increase. On the one hand, you can simply terminate uneconomical contracts cancel. On the other hand, you may also be able to use the Reduce services. For example, it would be possible to reduce the service level and encourage customers to use an app instead of calling your hotline. Or you could limit the calls and only allow 10 free calls per year.
Both strategies are forms of disinvestment. In either case, this will result in customers being dissatisfied with you. The repurchase rate will fall and you can assume that customers will communicate the negative experiences they have had with you to others. Research has found a few regularities in this context*.
About how you Making service contracts simple and lucrative have already been written about elsewhere.
The right strategy depends on the customer's satisfaction with the contract.
For customers who were previously happy with your services, downgrading the contract is the best solution. These customers are naturally the most likely to forgive you for this strategy.
For customers who have shown themselves to be rather dissatisfied with you in the past, it is advisable to terminate the contract. It doesn't go down well if you have to tell them that the previous service was not only poor, but also unprofitable for you and that the scope of services had to be reduced as a result. It is better to terminate the contract immediately.
You can assume that the customer will be angry in any case, no matter what you do. The only question is the extent of their anger at your actions.
The question therefore arises as to how you can reduce the resentment on the part of your disappointed partner. Two compensation strategies were tested in these cases. On the one hand, a simple Sorry and on the other hand the Financial compensation.
The customer's perception of financial compensation
Financial compensation can elicit very different reactions from customers. However, a few regularities can also be derived from the results here:
Previously satisfied customers should not be offered any money in the event of a downgrade. After all, you are unnecessarily drawing their attention to the deterioration in service. Otherwise, they would probably accept it relatively emotionlessly. In the case of contract termination, on the other hand, financial attention is definitely good for the mood. After all, the customer is satisfied with the contract and feels deprived.
With dissatisfied customers, the situation is exactly the opposite. They are more likely to be happy about a termination of the contract, but do not see the point in continuing to pay the same for a service that is perceived to be even worse. So only pay if the service is reduced.
In which cases does an apology have a positive effect on the level of anger?
If the contract is terminated, it is best to apologize to satisfied customers. In the case of downgrading, this is more likely to have a negative effect. You should therefore refrain from doing so in this case.
With dissatisfied customers, the situation is exactly the opposite. When downgrading the contract, it is better to explain to the customer why some things may not have gone perfectly and apologize for any omissions. After all, the customer is already unhappy anyway. He will be even less happy that the benefits now have to be reduced even further. If the contract is terminated, it is not advisable to apologize.
What is ultimately the best course of action in the event of unprofitable service contracts?
We have seen that the impact of financial compensation and an apology depends largely on the customer's previous satisfaction and has different effects in cases of service reduction or contract termination. The table again shows the respective recommendations for action:
The best way to proceed is as follows:
In the case of unprofitable contracts with customers who have been satisfied with the contractual relationship to date, it is best to reduce their service first. Of course, this should not be done on an ad hoc basis, but through regular adjustments to the terms and conditions of your contracts. Do not offer any additional financial compensation or apologies.
In the case of customers who are dissatisfied anyway, terminate the contractual relationship. Do not offer an apology or financial compensation.
*Source: Christina M. Haenel, Hauke A. Wetzel, Maik Hammerschmidt: The Perils of Service Contract Divestment: When and Why Customers Seek Revenge and How It Can Be Attenuated, Journal of Service Research 2019
