By Nicholas P. Hopek, TSYS

In a banking industry that can be described as uncertain at best, the tendency of companies to slash marketing budgets during a downturn is tried and true. Along with other areas of the company budget, marketing strategies have undoubtedly suffered a severe scaling back due to a flagging economy and anemic consumer spending. Indeed, when a crisis arises, new marketing initiatives — often with a return on investment that is difficult to quantify — are typically some of the first to be struck with that little red pen.

But what about de-marketing strategies? This seemingly counter-intuitive phrase has been making its rounds in banking and other industry circles, with return on investment per customer mattering more than ever. And the strategy is exactly what it sounds like — scaling back marketing efforts, but realizing positive results nonetheless. Whereas the traditional marketing process entails gathering and synthesizing demographic and social forces to identify unfulfilled needs and desires, de-marketing consists of pinpointing which segments of the population would not become fulfilled by the company’s offerings and removing them from your correspondence lists. Or, more simply put, striking unprofitable customers from a portfolio to then divert more resources toward those that really matter to the bottom line.

To answer the question of how to tell when a customer is unprofitable, in their book Competing on Analytics, Thomas Davenport, President’s Distinguished Professor of Management and Information Technology at Babson College, and Jeanne G. Harris, Executive Research Fellow and Director of Research at the Accenture Institute for High Performance Business, discuss how Royal Bank of Canada (RBC) measures the profitability of its clients. The first step was to identify labor cost, which accounts for 60 percent of RBC’s non-interest expenses.

Data was collected quarterly from general ledgers from individual cost centers, then segmented based on the products, services and activities performed by the unit. As an example, a segment could include all domestic branches, which sell similar services and products. RBC identified 30 to 40 of these individual segments and calculated the total staff time consumed by each activity, based on the time per activity multiplied by volumes processed. This made it possible for RBC to assign a salary cost to each segment’s products and activities, creating the ability to allocate general operating cost — something it hadn’t been able to do previously.

Once the cost information for products, activities and channels was collected, the data was aggregated by segments to calculate both transaction and total product cost. RBC then calculated the cost of “ownership” for each of its clients’ portfolios and separated the cost of each product in a client’s portfolio, based on the number of transactions and channel the client prefers to use.

But once a company determines exactly who resides in its most profitable and unprofitable segments, what are the next steps? In a Harvard Business Review article titled “The Right Way to Manage Unprofitable Customers,” the authors highlighted the strategies of two major companies — telecommunications provider Sprint Nextel and power company TXU — to manage their unprofitable customers. For one year Sprint Nextel tracked the frequency of calls to customer support by a single customer. Through additional analysis, it discovered that some customers were calling hundreds of times a month for the same issue. The company acquiesced, and instead of desperately clinging to an original contract in order to retain the customer, it decided that it could not meet the needs of these customers and terminated their contracts. The move was quite a departure from the more common policies of mobile providers, which tend to hold customers to their multi-year contracts no matter what.

With a strategy that used both carrots and sticks, TXU — a power provider in Texas — began turning off electricity for customers who did not pay their bills on time, and then charging a hefty fee to reconnect power. Customers who paid on time were given extra benefits for doing so. TXU was able to reduce their number of delinquent customers and increase the productivity of employees who otherwise spent time  fielding calls from non-paying customers wanting their power turned back on. In an interview with The Wall Street Journal a senior TXU financial executive said, “A customer who calls you every day is less profitable than one who pays on time and never calls.”

American Express has been the most recent company in the financial industry to unveil de-marketing strategies to shed risky or unprofitable customers. In February 2009, the card brand announced that it would pay select customers $300 to close their accounts and pay off the balance by April 30, 2009. While “firing” customers may seem somewhat counter-intuitive, it achieves American Express’ objectives of lowering risk and increasing profitability by ridding their portfolios of cardholders who may not use their cards frequently or who have high revolving balances.

A more scurrilous use of de-marketing is for the purpose of sending risky or unprofitable customers straight to your competitors. Several auto insurers, including Progressive Auto Insurance, participate in this practice with just a few point-and-click decisions. When a prospect visits the company’s Web site to research prices on insurances, they must enter information about their vehicle, driving record and desired monthly payment in assigned fields on the site. After inputting their personal information, the prospect is scored and, if deemed too risky or unprofitable, the auto insurance company will recommend that the customer use a competitor’s service. This practice enables companies to send the least desirable segments of customers to their competitors.

De-marketing with prohibitive pricing can be used not only to weed out undesirable customers, but also to bolster brand equity and reputation. Apple, Inc. has long priced its computers significantly higher than competitors to avoid compromising its brand image and to deflect costly customers that their competitors are more eager to serve. As a result, Apple’s customer base tends to be more technologically savvy and can solve technical issues without contacting the company’s customer service. Because of its reputation as an upscale brand, Apple customers also tend to be more loyal than those of other technology companies and are more likely to own more than one Apple product.

Through years of research, Apple determined that selling products and services to corporations was largely unprofitable, so it ceased sales efforts to companies and scaled back its B2B sales force. If a company wishes to buy a Mac computer, it must visit an Apple store or order the product online. A quick glance at Apple’s Web site displays no option for companies to shop for corporate-use products — a stark difference from the sites of competitors.

If serving unprofitable customers can deeply harm a business, what can be done to make those customers leave? For a service company such as banking, consider adjusting the fee structure to increase charges for services, such as customer service calls, that affect your bottom line. If it’s a specific product that proves itself to be unprofitable, companies can increase the product’s price and focus its efforts on encouraging prospective customers to buy substitute products.

Finally, a word of caution against ceasing the collection of data once a segment has been deemed unprofitable. Marketing executives should learn as much about each identifiable segment as possible, closely monitoring advertising potential, segment profitability and growth rate. As the current economic environment can readily exemplify, change is rapid and comprehensive information can lead to greater agility and a keener perspective when developing strategies that include both marketing and de-marketing efforts.