Thursday, April 21, 2011

When Is It Time To Say Goodbye to Customers?

There is interesting research being done to understand when and why should some customers be divested. Some of the work was documented by Mittal, Sarkees and Murshed in the HBR issue of April 2008. They categorized four critical reasons why companies might want to divest themselves of some of their customers.

The first, and most obvious reason, is profitability. Some companies find it easy to assess the profitability of a customer and hence can make the decision quickly. On the other hand, some companies may use analytical models to examine long-term customer value to find the customers that no longer provide the long term return that was originally expected. Insurance and finance companies may divest customers whose risk for massive losses might exceed company guidelines. This occurred in 2005 when Allstate Insurance and Nationwide dropped 95,000 and 35,000 respectively in Florida fearing future losses due to hurricanes. Filene's basement in Boston banned some customers for excessive returns.

The second reason is to increase employee productivity that may be reduced by obnoxious customers that may have a negative impact on the employees to the extent that some may resign to avoid further confrontations. This also occurs in professional organizations when clients work the company employees assigned to them too hard or that the client could never be pleased which required unreasonable amounts of rework.

The third reason is capacity constraints that may occur. Companies may underestimate customer demand or the effects of new regulations or environmental forces. This could occur as imply as the limitation of available skills when a new product or service is announced. The Sarbanes-Oxley act significantly increased the time that employees had to spend on compliance matter and consumed all the available resources to the point that some companies simple didn't have enough manpower to serve all their customers.

The fourth and final reason is that some companies see customer divestment as a consequence of changing business strategies and products. When the company decides to stop offering some products or services the lose the ability to serve some of their clients that depended on the dropped products and services. It may be as dramatic as divesting an entire business unit. Another way this might occur would be if the company had made a strategic mistake in the past and in the process of correcting the mistake had to drop one or more product lines or divisions.

The bottom line is that customers are not forever. Just as products and services need to be reviewed and upgraded or replaced to adapt to market changes, so must companies assess their customers.

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