Thursday, December 13, 2007

When bad customers are good

It's a current mantra: fire your bad customers. Sprint, for example, cut off customers who were using its call center to excess. But the logic doesn't always go through.

In the study, "Customer Value-based Management: Competitive Implications," Zhang, Raju and Subramanian [Wharton School of Business] break ground by analyzing CVM in the context of a competitive environment. The researchers acknowledge that firing bad customers may make some sense in industries where there is little or no competition. If a firm treats all customers equally, the argument goes, not only does the company waste resources on attracting and retaining unprofitable customers, it also under-serves profitable customers, who may become unhappy and leave.

However, for the overwhelming majority of companies operating in a competitive environment, firing low-value customers can be counterproductive, the researchers conclude. The key reason: Companies that rid themselves of low-value customers -- or take steps to turn low-value customers into high-value ones -- leave themselves open to successful poaching by competitors. If the competition knows that you have fired many or all of your low-value customers, they are likely to intensify their efforts to take your remaining customers away from you because they now know that all, or most, of those remaining customers are of the high-value variety.

Read more here. It may pay to keep that chafe around for protection.


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