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Published: 12/04/02
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The Customer Profitability Conundrum: When to Love 'Em or Leave 'Em

The customer may always be right, according to the old adage. But here is a not-so-old adage that is just as true: The customer may not always be profitable. That's why more companies are starting to take a harder look to determine which customers are worth serving and which should take their business elsewhere. The notion of eliminating customers may seem counterintuitive but in many industries analyzing customer behavior, and responding with strategies to make them as profitable as possible, is essential to long term success.

The customer may always be right, according to the old adage. But here is a not-so-old adage that is just as true: The customer may not always be profitable. That is why increasing numbers of companies are beginning to look more closely at their customers to determine which of them are worth serving and which should take their business elsewhere. Put simply, it is sometimes necessary to identify and get rid of your worst customers -- preferably by encouraging such customers gently but firmly to migrate to your competitors.

The idea of eliminating customers seems counterintuitive, almost sacrilegious: What company wants to lose customers? But faculty members at the University of Pennsylvania’s Wharton School and consultants at Booz Allen Hamilton say in many industries — consumer products manufacturing, health insurance, banking and telecommunications among them — analyzing customer behavior and responding with strategies to make them as profitable as possible is essential to improving overall corporate profitability and making the most efficient use of scarce resources.

“Companies are beginning to look more closely at their customers to determine which of them are worth serving and which should take their business elsewhere.”
These experts caution, however, that terminating a relationship should be a last resort, after all efforts to transform a bad customer into a profitable one have been tried and failed.

“Some of my clients now tell me they’re sorry they listened to consultants five years ago when we told them to get rid of unprofitable customers,” says Chris Dallas-Feeney, senior vice president in Booz Allen’s New York office.  “In banks, where I spend a good bit of my time, executives in the 1990s were told to get out of the mass market and focus on more affluent, profitable customers. Today, they’re saying, ‘To heck with that, we want to serve every customer we can.’ As consultants we have to amass significant evidence to prove a particular customer segment is a dog and therefore you shouldn’t bother.”

One Wharton marketing researcher, Peter Fader, goes even further, challenging the very idea that a company can know when to reward good customers and fire unprofitable ones, especially in the business-to-consumer sector. “Despite our desire to explain everything that a customer does, much customer behavior is very random,” he says. “You might have a hot period where a customer is buying a lot of your product, then a cold period. People’s tastes and habits evolve over time. It’s hard to look at the past and say with a great sense of confidence, ‘This will be a good customer and this will be a bad one.’”

Although most marketing strategists argue that managing relationships based on customer profitability is both possible and beneficial, it is surprising how few marketing departments collect even basic data. “It’s amazing to me how many large corporations track their sales but don’t do a very good job of tracking sales to whom,” says Wharton marketing professor David J. Reibstein. “Shipping departments handle some of that information, but knowing who bought what hasn’t always been tracked closely by the marketing people.”

But that is changing as companies across industries have reorganized and restructured their businesses to be less product-oriented and more customer-focused. Notes Wharton marketing professor Barbara Kahn: “When companies were product-focused, they would prune unprofitable products. Now, they also look increasingly at the profitability of customers.”

What’s a Bad Customer?
Gary Ahlquist, a senior vice president of Booz Allen Hamilton, based in Chicago, says: “In most industries bad customers are those who do three things: they order rarely, they pay slowly or not at all, and they make unreasonable demands. They want a product or service but they don’t want to pay for it. So they end up being tough to deal with or unprofitable.”

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