Should You Fire Your Worst Customers?
Customer Relationship Management is a hot business concept right now, and why not? It makes a lot of sense. Use quantitative methods to determine the value of individual customers, and give perks and privileges to high-value customers. A company can either try to turn low-value customers into high-value ones, or simply fire them. The numbers prove they cost more than they're worth anyway.
Logical as it may sound, research from Wharton professors, Jagmohan Raju and Z. John Zhang, and Wharton doctoral student Upender Subramanian announced today in Knowledge@Wharton suggests firms should think twice before firing low-value customers. Why?
Firing low-value customers can be counterproductive.... 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 them away from you because they now know that all, or most, of your remaining customers are of the high-value variety.Trying to turn low-value customers into higher-value ones, results in the same problem. And as most or all of the companies in an industry invest in CRM technology to maximize the value of their customers, whole industries can suffer due to the high cost of this CRM arms race. So what's the alternative?
Improve the quality of your high-end customers at the same time that you keep your low-end customers, but you should find other, cheaper, ways to manage the low-value customers, such as encouraging them to use automated phone-response systems or the Internet or offering minimal discounts or other benefits... You have to keep your competition confused about who your good and bad customers are.The new rules of business warfare: avoid a CRM arms race and retain the element of surprise. That makes sense too.