Yesterday, I was reminded that loyal customers do not always equal profitable customers.  This may sound counter intuitive but it is true.  Think about your active customers.  Now consider your cost to serve each customer.  Is it possible that you have some customers that consume large amounts of service from you but their payments to you don't cover your costs?

This was a striking lesson to me a few years ago when I was marketing to a large consumer base of technology buyers.  Their average order size was about $380 and they gave us a 90%+ customer satisfaction rating year after year.  They typically were attracted by special offers.  This group of customers was also our highest users of free technical support services and were more likely to return a product than other customers. 

Unfortunately, the sad fact was that the gross profit dollars earned from these customers did not cover our cost to serve them after they made each purchase.  So although these customers were "loyal" and loved the service that they received.  Economically it was not a viable business model.  So what did we do?

We got rid of them.  We changed the service offering to limit their access to technical support.  We made return privileges a little less liberal and we did our best to remove them from our marketing mix.

As a result, our "customer retention" metrics plummeted and the size of our customer base dropped.  If you were looking for a problem known as customer churn - you would think we had it.  However, profitability and revenue both accelerated - by a large measure.  We matched our customers to our cost structures.

So - I ask you - how many of your customers do you need to get rid of?  Is there a body of customers that are draining profits from your company?  Do you have a group of customers that are better served by a competitor or by a different channel?

It's not always popular, but it's just as important to know who you don't want to do business with as it is to know those that you do want to do business with.  In economic downturns this can be a very viable and useful method for cutting expense, increasing revenue and improving profits.  I know - it works.

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