When clients ask us if and how they should get rid of less valuable customers there isn’t an easy answer. It isn’t always the boost to profitability that it was promoted as, says a study by two Wharton marketing professors, Jagmohan Raju and Z. John Zhang, and Wharton doctoral student Upender Subramanian. The notion of firing less profitable, costly customers is part of a recent practice called Customer Relationship Management (CRM.)
Many companies have reviewed their internal data trying to weed out customers who spend little while tying up customer service resources by repeatedly calling for support or returning products. A business divesting itself of these least profitable customers is supposed to see lowered costs, while maintaining the valuable customers that bring in the bulk of its profit.
However, concentrating a business’ client base into only high-value customers seems to give the advantage to the competition. Once a competitor sees that the customers have been boiled down to only profitable individuals, they can begin stealing business in earnest, knowing that every turnover will be easy profit. According to the study, low-value customers provide camouflage, hiding more valuable customers and protecting against the poaching of competitors.
The study recommends keeping both kinds of customers, but finding ways to use cheaper customer service solutions for customers of lower value, such as encouraging them to use online support or referring them to automated phone systems. You can read the full article here.