Baker’s Law: Bad Customers Drive Out Good Customers

We hold these truths to be self-evident, that all men are created equal.

—Thomas Jefferson, The Declaration of Independence, July 4, 1776

Whenever anyone quoted those immortal words from the Declaration of Independence—“all men are created equal”—Federalist Fisher Ames, an ardent opponent of Thomas Jefferson and a superb congressional orator, would retort, “And differ greatly in the sequel.” While Fisher’s admonishment might not be the best way to administer a country’s laws—before which all should be treated equally—it is profound when it comes to understanding that no two customers are equal. A German Proverb teaches, “He who seeks equality should go to a cemetery.”

All firms have a theoretical maximum capacity and a theoretical optimal capacity. From a strategy perspective, it is essential to see how that capacity is being allocated to each customer segment. Ensuring a proper amount of capacity is allocated to various customer segments, while offering a differentiating value proposition within each segment, is an essential element of implementing price discrimination strategies. It also prevents bad customers—those who are not willing to pay for the value you deliver—from crowding out good customers.

Customer Grading Criteria

It has become common for firms to grade customers and focus attention on the “A” and “B” customers and even hold out incentives to the “C” customers to upgrade to higher status. In this section, ...

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