Friday, December 28, 2007

Should you fire your worst customer(s)?

Conventional wisdom reminded us “The customer is always right”. Companies went to great lengths to placate customers and bent over backwards to achieve high customer satisfaction scores.

Then, in the 1990’s the science of CRM (Customer Relationship Management) highlighted the differentiation (of cost vs. revenue) across different customer sections (via customer segmentation). CRM depicted clearly how different customer segments had varied costs (to serve) and revenues – which were not necessarily proportional. While this was probably known at an abstract level, CRM provided tools and techniques to measure the cost to serve a particular customer segment as well as the corresponding revenues.

This led to the realization that the lowest value customer(s) were at times very expensive to serve. The cost to serve them far outweighed the benefits and sometimes they would drain the company’s scare resources. This caused companies to look carefully on whether they should keep or fire those customers. Recently, Sprint fired a small section of its customers who were disproportionately calling customer service.

Read this letter that Sprint sent out in June 2007 firing low-value (high-nuisance) customers

Brad Anderson, CEO of Best Buy publicly stated that he wanted to separate the “angels” among his 1.5 million daily customers from the ‘devils”.

However, recent research by Professors at the Wharton School arrives at a different point of view. They argue via empirical (market) data and theoretical models (applied game theory, Nash equilibrium) that firing customers may not necessarily be a good idea. They state that firing low-value customers may actually decrease firm profits and that trying to increase the value of these customers may be counterproductive. This is a certainly a contrarian view.

However, they do agree that companies need to provide differentiated service to various customer segments (e.g. provide high-touch to high-value customers). They do agree with the concept of Customer Value Management (CVM) – to maximize the lifetime profitability of your customer base. They say that if you fire your low-value customers, it provides competitors with an easy target (to go after your existing customers who they know are high-value customers). They say that if you make low-value customers more valuable, this can also be counter-productive because it also encourages your competitors to poach more intensely.

Their research states that the optimal solution is to keep the high-end customers and at the same time keep the low-value customer but find cheaper, better ways to manage them (self service, etc). You have to keep your competition confused about who your good and bad customers are.

I agree that there is a case to be made for firing low-value customers. However, this new research does offer a strong point of view – to NOT fire low-value customers. This is especially true in a highly competitive market – where firms are on the lookout to poach customers. So, the next time your boss asks you to fire a low-value customer – do consider this contrarian view.

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