Why Firing Your Worst Customers Isn’t Such a Great Idea

KNOWLEDGE@WHARTON—Fire your bad customers.That piece of advice has become widely accepted in recent years as companies have sought to manage their relationships with customers in more sophisticated ways. The rationale for this idea is clear-cut: Low-value customers — such as the ones who hardly spend any money on your services or products yet tie up your company’s phone lines with questions and complaints — end up costing more money than they provide. So why not jettison them and focus your customer-relationship efforts on more profitable individuals? Or, as an alternative, why not at least try to increase the worth of the low-value customers to your firm? If a firm has only valuable customers, the thinking goes, its profitability and shareholder value should increase.It all sounds quite rational, and many corporations have jumped on the bandwagon. But a new study by two Wharton marketing professors, Jagmohan Raju and Z. John Zhang, and Wharton doctoral student Upender Subramanian, cautions that firing low-value customers may actually decrease firm profits and that trying to increase the value of these customers may be counterproductive. Read article.