When customer value management destroys customer value

One of the practices typically employed by CRM consultancies and larger companies is something called customer value management. In a nutshell, CVM defines a customer by his or her "profitability". This is sometimes difficult to asses, since you have to track operational and marketing costs per customer (or make some educated guesses), and then allocate those costs against your per customer revenue. The simple calculation of revenue minus allocated costs can get you started. You can also look at the odds of keeping customers year over year, coming up essentially with the financial equivalent of a decaying pile of uranium (same math predicts half-life). The greater the odds of keeping customers, the more the impact of their profitability (or lack thereof) will have on firm performance.

So, the idea is to make the best customers (most profitable customers) as loyal as possible, and to diminish the negative impact of so-so customers and worst customers (money-losing customers). Some firms even promote "firing" the money-losing customers.

Sounds all good in theory.

But here's a PERFECT example of how customer value management can create major headaches for companies, not to mention that the company in the article -- a financial services firm named Egg -- forgot the first rule of business. If your customer has a share of wallet that you do not yet own, figure out how to own it. In short, if you've got unprofitable or less-than-ideally profitable customers, maybe you're just engaging them incorrectly.

Egg bought by US-based Citigroup for £575m.

UPDATE:
I've been thinking about all this. The key thing for banks is to make money off what they lend to you, or on the fees they can charge you. In the article, essentially Citi is using the CVM strategy of "firing the least profitable" customers because these customers pay off their credit cards. From a "get corporate value fast after this Egg acquisition" point of view, that makes sense.

BUT.

Look at the potential for total lifetime customer value for these "low profit" customers. How do they pay off their credit cards? With earnings. Perhaps they pay them off because the personally value having low debt. Perhaps they pay them off because they can, but not necessarily from a desire to be debt-free.

In either case, Citi has a segment it can market to. First, for those people who don't want to have a lot of debt, and have excess cash to pay of their credit cards, Citi could approach them for investment accounts, pitching these as "a better way to save money." This appeals to the value of building equity, not debt. As for the other segment that doesn't necessarily value building equity or eliminating debt (even though their behavior is to pay off their credit cards), the pitch might be a lifestyle one. Get more life out of your dollar. That might mean vacation accounts, for example. Or continuing education accounts.

But, these creative approaches aside (and they'd be hard to implement at Citi since I bet their marketing/product folks don't speak the same language as their accounting/finance folks), Citi still has a fundamental problem with their new Egg acquisition.

Pissed off customers.

And that means brand equity will drop. And that means the intangible asset value of the acquisition is dropping, like an egg.

Splat.