When Customers Push Back: The Dangers of Service Divestment and How to Avoid Them

What is it about?

Divesting from unprofitable customers is prevalent in many service industries. Service providers often demote (i.e., they cut back services) or terminate customer service contracts (i.e., they end service provision). Service providers adopt these practices in order to enhance profits. The idea is that investing less in unprofitable customer relationships saves costs and enhances average customer profitability. This research shows that such practices can severely harm future business. Service demotion and termination trigger customer revenge, including aggressive behavior and negative publicity. The authors do have good news, however, for service providers who rely on divestment practices. The study reveals that customer revenge is much less likely if customers implicitly agree with the service provider’s divestment initiative. Unsatisfied customers are less likely to become angry and take revenge when their contracts are terminated than when they are demoted. For satisfied customers, it is the other way round.

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Photo by Brooke Lark on Unsplash

Photo by Brooke Lark on Unsplash

Why is it important?

For many service providers, these findings may come as a surprise as “firing customers” is generally viewed as a last resort. However, drawing an analogy to romantic relationships (that many have experienced themselves) helps to understand the findings: It can be very relieving if an unhappy relationship is ended, whereas we prefer to get a second chance if we value a relationship. The study offers another counterintuitive finding: Offering financial compensation or an apology is a double-edged sword that can serve to remedy customer revenge after experiencing service divestment—or reinforce it. it is best to offer financial compensation or an apology only to “turn around” customers who disagree with the service provider’s divestment choice and are likely to take revenge (i.e., if satisfied customers’ contracts are terminated or if unsatisfied customers’ contracts are demoted). It does not make a difference whether financial compensation or an apology are offered, an interesting finding in itself as offering an apology is a much cheaper option.

Perspectives