November 09, 2009

Firing Customers

E-mail me if you want a copy of the OMS spreadsheet to follow along with on our examples. Click here to buy the book on Amazon, or click here to purchase the book for your Kindle.

The concept of firing customers is a popular one. We read a lot of content that tells us to focus on the 20% of our customer base, the part of the customer base that generates most of the demand.

I'm not here to tell you that the strategy is right or wrong. I'm here to give you the tools to understand what it means to fire customers.

In our OMS spreadsheet, we grade customers with a grade of "A", "B", "C", "D", and "F". So today, we're going to attempt an experiment.

Open your spreadsheet. Notice the five year sales trajectory of this business.
  • Year 1 = $75.9 million.
  • Year 2 = $70.4 million.
  • Year 3 = $66.7 million.
  • Year 4 = $64.4 million.
  • Year 5 = $62.9 million.

Clearly, this business is in free fall. So, let's do something odd. Let's fire every customer with a grade of "D" or "F". These customers cannot purchase again, ever. We'll literally block them from buying from us. Any customer that falls into a grade of "D" or "F", during the next five years, is prevented from buying again in our simulation.

Enter the value "0.00" into cells C245 - C340. This means that customers with a grade of "D" or "F" cannot buy again. We'll keep acquiring new customers. Take a look at the results.

  • Year 1 = $73.4 million.
  • Year 2 = $66.1 million.
  • Year 3 = $60.4 million.
  • Year 4 = $56.1 million.
  • Year 5 = $52.9 million.

In the first year, firing customers has almost no impact on sales ... sales decrease from $75.9 million to $73.4 million.

In the fifth year of the simulation, firing customers has a significant impact on sales ... sales decrease from $62.9 million to $52.9 million.

Your job is to determine if this type of decision increases profit, or decreases profit. My job is to show you that there is a cumulative impact that results from the decisions we make today. So many of us in the Web Analytics community and Online Marketing community look to optimize conversion rate, seeking to optimize the performance of the business today.

Hint: The Online Marketing world is "inefficient". When everybody is trying to optimize short-term results, you gain a competitive advantage by optimizing long-term performance. Use the OMS framework to do this!!