Wonks Advise Against Firing 'Slug' Customers

The University of Pennsylvania's Wharton School marketing professors Jagmohan Raju and John Zhang, and Wharton doctoral student Upender Subramanian have found that the all-too-common CRM practice of firing low-value customers "may actually decrease firm profits," and that even "trying to increase the value of these customers may be counterproductive."

The conventional wisdom is that low-value customers, the scofflaws who don't spend all that much money on your services or products but who are always on the phone with questions and complaints, are net losses which, if they can't be upgraded, should be axed.

The Value of a Customer

A great deal of CRM technology goes into identifying such slugs, and to prod them with better privileges and poke them with discounts or other inducements to see if there is a high-value customer butterfly hidden in there somewhere.

Raju and Zhang give us a new buzzword, CVM, for "customer value-based management," to describe this notion. Their customer analyses, to nobody's surprise, show that usually it's a small proportion of customers who are responsible for a large percentage of profits. Of course, slugs abound.

However, Zhang, Raju and Subramanian decided to analyze CVM in the context of a competitive environment. They found that if you don't have much competition in your industry, you can get away with firing bad customers. Anybody involved in the American hazelnut industry can stop reading now.

Encouraging Poaching

For the rest of you, who do operate in competitive environments, "firing low-value customers can be counterproductive," the study finds, since "companies that rid themselves of low-value customers, or take steps to turn low-value customers into high-value ones, leave themselves open to poaching by competitors."

"What our analysis tells us is companies make money, in part, by confusing their competitors about their customers," Raju said. "If you make your customer base transparent by firing your low-value customers, competitors will hit you hard because you will be left with customers of one type."

Even throwing inducements at your slugs to change their slug-like behavior, such as teaching them to spend more or to use low-cost support channels, backfires, the Wharton researchers found: "If you make low-value customers more valuable, this can also be counterproductive because it also encourages your competitors to poach more intensely," Raju said.

A Different Approach

So what to do? "Improve the quality of your high-end customers at the same time that you keep your low-end customers, but 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," said Raju.

The study provides what the researchers call the first theoretical analysis of CVM practices when CVM capabilities are potentially available to all firms in an industry. The model assumes that the firms have access to the same CVM technology, that the firms are equally efficient in offering inducements and that each firm can identify its customers.

Because hey, after all, they may be slugs, but they are your slugs.