Should You Dump Customers?
Of course, not all hand-raisers will prove to be valuable customers. Indeed, some executives argue that not all customers are valuable customers. At electronic and industrial communications products maker Woodhead Industries Inc., CFO and vice president of finance Robert Fisher says management’s thinking in the past has been that any customer is a good one. “We’ll sign up anybody who will sell our products,” he says. “That may not be so smart.”
To get a little smarter, Woodhead (also based in Deerfield, Illinois) has started developing a framework for lead management and contact information to work with global customers like DaimlerChrysler and Ford Motor Co. The company is also implementing a business-intelligence platform from PeopleSoft. Fisher says the technology will enable Woodhead management to see instantaneously what the company is shipping, by customer, product line, location, and the like. Further, sales managers will be able to group customers by gross margins. Says Fisher, “I want to identify customers who I want to spend more time with and the ones I want to dump.”
He’s not alone. Ditching costly customers has become something of a corporate mantra in the past few years. But some consultants say relying on clustering to deep-six a segment of customers can be a tricky business. In fact, some rail against the practice. “Rarely is it a good idea to dump a customer,” insists Laura Preslan, research director at AMR. “The cost of acquiring a new one is so high.”
What’s more, profit profiles (which are usually based on overhead and other support costs) can be way off. Warns Gareth Herschel, research director at research firm Gartner: “You may end up kissing off an entire segment of valuable customers simply because you misfigured the depreciation of a printer in Poughkeepsie.”
Analysts also point out that today’s costly customer could turn out to be tomorrow’s cash cow. Herschel recalls how, during the early 1990s, many companies were eager to ditch customers that placed a lot of calls to customer-service centers. But then the Internet came along, making it cheaper to service those customers and providing a lot of low-cost cross-sell and up-sell opportunities. “You were desperate to get rid of a customer,” he says. “Now, you’re not.”
In other words, customers and their circumstances change. That’s why analyzing customer information remains an imperfect — and never-ending — quest. A case in point: a director of analytics at an Internet service provider (ISP) points out that users with the highest risk of canceling their service used to be those who simply didn’t find the Internet interesting. Based on that data, the ISP might have considered launching such things as streaming video and music. Over time, however, the profile of likely defectors has changed. Nowadays, the customers most likely to break their service contracts are those who have slow-processing computers. Launching more entertainment features — those that require fast processors and tons of bandwidth — will do little to ease their pain.