Marketing textbooks recommend that firms target profitable customers and induce greater selling efforts as a way of charging higher prices and earning superior profits. However, according to a recent publication by Alex Thevaranjan, associate professor of accounting at Syracuse University‘s Martin J. Whitman School of Management, in collaboration with Sumitro Banerjee (Grenoble Ecole de Management), such targeting can lead to sales spilling over to unprofitable customers. They show that the low level of purchases by these thrifty customers do not compensate enough for the salespeople time they consume. This becomes a serious problem when the unprofitable customers are also unidentifiable.
His research argues that the current tendency to use information technology to identify and avoid serving these unprofitable customers is not only socially unappealing but also runs the risk of masquerading and misclassifying customers. In addition, his research finds that the traditional approach of raising prices to keep the unprofitable customers away is also counterproductive, as it lowers the overall profits earned from profitable customers. In contrast, the most efficient way to screen the unprofitable customers, according to Thevaranjan’s findings, is to lower both the prices and the selling effort.
Surprisingly, he also shows that when the profitability of the target customers and the ability of the salespeople are very high, accommodating the unprofitable customers is more profitable than screening them. Accommodation allows the firm to induce higher selling efforts and charge higher prices and the resulting increase in profits from the profitable customers more than compensates for the loss incurred by accommodating the unprofitable customers.
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