Use CRM to Identify Customers for Better Service, Not Zero Service

David Sims ran an insightful article in TMCnet a few weeks ago, discussing why "Firing customers is a bad idea". Sims cites a study from the Wharton school that disproves the common, and in my opinion incorrect, philosophy of shedding your less valuable customers to increase profitability.

Many of the business-minded CRM professionals will argue that low spending customers take up too much time and effort to make up for the smaller percentage of profit they bring in, in comparison to the high spending customers, which take up the same amount of resources but return much more. The argument is that getting rid of the less profitable customers provides more time and resources for the more profitable ones.

Although I understand the basis for this concept, it has never completely worked in my mind. Instead of changing your customer base, why not change the way you work with your customers? Reallocating resources to more effectively manage all of your relationships will help improve profitability with high value customers, without sacrificing all of the lower value customers.

Sims brings up the point that CRM technology can be utilized to analyze and segment your customer base to determine which type of customers are which. In the old model this function could be used to shed the unwanted customers, but I agree with the Wharton study, that segmenting your customers can have a much more beneficial purpose: targeted and specialized relationship management.

Once you are able to identify the high-end customers from the low-end, you can tailor your sales and support more directly to each, enabling growth of both segments towards greater profitability.

There are two obvious reasons that you may not want to sacrifice your lower value customers: first, ridding yourself of any customers gives your competitors an opportunity to pick them up. If a customer needs your service and you won't provide it for them, they will easily switch to your competitors. Second, any good business relies heavily on word-of-mouth to fuel sales. What are these lower value customers going to be saying about your company if, instead of adjusting your service, you give them the axe?

The way I see it, CRM software should be used to get and grow customers, not classify and shed them.