I have always been intrigued by the idea of firing customers. During turbulent times, the pressure has been on managers to make decisions that allow the organization to build up substantial cash reserves. And so the challenge has been on understanding the profitability of customers and the cash flow implications of doing business with them.
This kind of analysis begs the question, then, of whether customers should be "demoted" or "fired" customers. Old news but still a good example is that of American Express, who offered to pay some customers $300 each if they closed their accounts with American Express by April 30, 2009. At the time, American Express was rightly concerned about the increasing risk of credit card defaults.
But what are the long-term implications of firing customers? It is easy to conduct a cost benefit analysis using numbers. This is what American Express no doubt did when it decided which customers to fire and what it was worth to incentivize customers to leave. What is more difficult, however, is to put a value on negative word of mouth, made even easier by social media. American Express has certainly had its fair share of negative word of mouth.
While we know that the economy moves in cycles and there was certainly talk of a correction before the recession hit. It was difficult, however, to predict the speed and severity with which the current recession hit. So, it is easy to be an armchair critic and suggest that organizations should avoid the acquisition of potentially unprofitable customers in the first place.
But even though customers are the reason you are in business, not all customers are worth retaining. A bad customer is one that will put the organization at risk financially. A really bad customer is one that not only puts the organization at risk financially but also jeopardizes the overall strategic position of the organization. Thus, it is important to understand both the financial and strategic implications of doing business with all customers.
As organizations are looking to implement marketing strategies for growth, good management and marketing practice should not be forgotten. Drucker's five famous questions need to be asked: What is our mission? Who is our customer? What does the customer value? What are our results? What is our plan? Linking together Drucker's ideas of customers and results, I'd add the question of how profitable is each customer group before going out and acquiring customers for the sake of growth itself.
Jenny Darroch is on the faculty at the Drucker School of Management. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com