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Journal of the Academy of Marketing Science

17.08.2019 | Original Empirical Research

The impact of unprofitable customer management strategies on shareholder value

verfasst von: Hui Feng, Neil A. Morgan, Lopo L. Rego

Erschienen in: Journal of the Academy of Marketing Science

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Abstract

A significant proportion of many firms’ customers are unprofitable. The question of how unprofitable customers should be managed has recently received increasing research attention from the customer and manager angles, but the effects of unprofitable customer management (UCM) strategies on shareholder value is unknown. Using an event study methodology, we examine stock market reactions to disclosures of firms’ UCM strategy decisions. Results from a sample of UCM strategy disclosure events reveal an average short-term abnormal stock return of −0.53%. Drawing on signaling theory logic, we explore a number of signal (UCM strategy), signaler (firm engaging in UCM), and signaling environment characteristics that may affect the shareholder value effects of firms’ UCM approaches. Our analyses show that investors respond more favorably to indirect UCM strategies than to direct customer divestment strategies. We also find that particular types of indirect UCM strategy approaches and strategic intent in UCM strategy adoption, stronger firm marketing capabilities and, and positive publicity can help mitigate the generally negative abnormal stock returns observed. Overall, our findings have important implications for marketing theory and provide actionable new insights for managers into how to approach the management of unprofitable customers.

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In this approach, the “event” concerns disclosures (either voluntary or involuntary) concerning firms’ UCM strategies. We use the event study method because although a prevalent phenomenon, such customer management strategies are difficult to observe; one way they can be studied is to examine public disclosures about such decisions. An obvious drawback is potential selection bias. To control for firms who adopt UCM strategies but this information stays private, or firms who do not engage in UCM at all, we identify significant predictors of firms’ adopting UCM and use these in the first stage of a Heckman two-step model to control for such selection bias in our later analyses.

The only study to have investigated the accounting performance outcomes of direct UCM actions—customer divestment (Reinartz et al. 2004) found weak and conflicting results when perceptual and objective (ROA) performance measures are used. No prior study has investigated shareholder value outcomes.

Firms also engage in direct UCM strategies by divesting customers for other reasons including government regulations and shifts in business strategy (e.g., Mittal et al. 2008). While, we control for these in our analyses, the focus in this study is on low customer value as the driver of firms’ UCM strategies.

Finance theory suggests that the residual value of the firm is determined by the quality of the firm’s tangible and intangible assets (such as customer relationships and brands), as these influence the level, risk, growth and longevity of the firm’s longer-term future expected cash flows.

While firms could use a combination of different strategies, we find only three such cases in our sample (all using both price increases and tiered-service). Excluding these firms does not affect our later hypothesis testing results.

All news media assessments were performed on the same day (event date) as the announcement. However, if an UCM announcement occurred after 4 pm EST—closing of trading hours for the major U.S. stock markets—then, both the event date, as well as the news media assessments, were made on the immediately following trading day.

Alternative indicators of prior performance such as ROA, sales growth, and margin growth produce essentially the same hypothesis testing results.

This captures reporter sentiment reflected in the news report. Both human coded sentiment and text-analysis software (LIWC) derived sentiment from the news in window [0,0] yielded similar results in our analysis.

Alternate measures of profitability including gross profit, net income and earnings produce essentially the same hypothesis-testing results.

The AR is still negative and significant (AR = −.61%, p < .05) for the sub-sample of direct divestment (n = 112).

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Titel: The impact of unprofitable customer management strategies on shareholder value
verfasst von: Hui Feng
Neil A. Morgan
Lopo L. Rego
Publikationsdatum: 17.08.2019
Verlag: Springer US
Erschienen in: Journal of the Academy of Marketing Science
Print ISSN: 0092-0703
Elektronische ISSN: 1552-7824
DOI: https://doi.org/10.1007/s11747-019-00686-2