Magazine article Ivey Business Journal Online

Relationship Demarketing: Managing Wasteful or Worthless Customer Relationships

Magazine article Ivey Business Journal Online

Relationship Demarketing: Managing Wasteful or Worthless Customer Relationships

Article excerpt

Some managers, perhaps many, have been tempted to hit the "delete" button when dealing with troublesome or unprofitable customers. In fact, dropping customers or "demarketing" should be built in to a company's practices. As this author writes, the gains from relationship demarketing would be very large if the strategy allowed a company to focus its resources and strengthen its relationships with the customers who matter most.

Customers that frequent Best Buy stores fall into two categories, says the electronics retailer: "angels" and "devils." The angel customers are apparently less demanding than the devils, and spend more money on expensive, new technologies. Devil customers, on the other hand, seemingly buy products, apply for rebates, return the purchases, and then buy them back at returned-merchandise discounts. They ask the store to honour their lowest-price pledge by finding prices quoted on the Internet. In the words of Best Buy's CEO, Brad Anderson, devil customers "can wreak enormous economic havoc."

This article is about demarketing those customer relationships a company does not value.

Customer portfolio

Companies have paid much attention to managing the attitudes and behaviours of their customers for better business results. However, they could do more to improve their performance if they also upgraded their mix of customers. Most companies manage their product markets more or less like investment portfolios, which makes sense if the main assets of the business are product markets. But if customers are seen to be the most important assets of the business, the firm must think in terms of customer portfolios, and allocate its resources to achieve profitable long-term relationships.

One way to assess a company's customer portfolio is to use a matrix similar to that described in Chart 1. By building relationships with preferred customers and managing other customer relationships for greater lifetime profitability and strategic value, companies can improve business performance. Banks, for example, encourage their perceived run-of-the-mill customers to use ATMs and Internet banking, reducing the cost of service delivery and improving profitability. Companies such as Bell, Rogers and Sears Canada seek multi-channel and multi-service relationships to achieve more complex relationships with desirable customers, which increase the strategic value of these customers.

The wrong customers are wrong

It is often said that the customer is always right, but most businesses know this to be a trite saying. Only the right customers are always right, and that is because these customers fit the company and the company wants to keep them. The right customers are satisfied. They derive value from what the company does and are aligned with the firm's processes and communications. They provide referrals and positive word-of-mouth. They make money for the company. They are the company's future.

On the other hand, customers who are not profitable now and who probably never will be, and who are perpetually and demonstrably unhappy, are the company's past. They are anchors to improvements in future performance.

If the right customers are right, the reverse is true, too. The wrong customers are wrong and should receive differential treatment. In some cases, customers that are wrong for the company's present operations might represent an opportunity for a new line of business or an entirely new venture, but in general, the company needs to consider how to handle customers that do not fit with the firm's future. This different handling can involve de-emphasizing some customer relationships and extend to demarketing the wrong customers, an initiative that requires finesse.

Before deciding whether to cultivate the wrong customers, a company should assess the gains to be had by improving its customer portfolio. How much more profitable would the company be if it had no bad customers in its portfolio? …

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