Fascinating article in the Wall Street Journal about how retail electronics giant Best Buy is adopting strategies based on research by a Columbia Business School professor that focus the merchant on catering to high profit customers – and “firing” customers that lose it money.

The notion of analyzing custom profitability and adopting strategies to either shed ones deemed unprofitable or change pricing, services or policies to improve their economics has been around for awhile – though few companies have had the guts to actually execute such strategies. Those that have, generally are manufacturers or distributors, who in most cases can simply cut off unprofitable customers/channels if they want. It’s quite another thing for a retailer to do so, given retail price transparency, generally homogeneous service policies, and open door access to all customers.

And what is an unprofitable retail customer anyways? Well, for Best Buy anyways, they are “devils” – defined as customers who “buy products, apply for rebates, return the purchases, then buy them back at returned-merchandise discounts. They load up on “loss leaders,” severely discounted merchandise designed to boost store traffic, then flip the goods at a profit on eBay. They slap down rock-bottom price quotes on Web sites and demand that Best Buy make good on its lowest-price pledge.”

Enter Best Buy CEO Brad Anderson, who was smitten by the theories of Columbia professor Larry Selden, whose research has shown unprofitable customers can wreak havoc on a customer’s bottom line and stock price. Despite resistance from his leadership team, CEO Anderson has forced through changes that cater to the most profitable customers and discourage the devils.

Five distinct highly profitable customer segments were identified (e.g., upper income men, suburban women, technology lovers), and pilot stores adopted specific merchandising strategies and sales associate training programs to cater to two of them, depending on the store’s local demographics. Meanwhile, Best Buy also started new restocking fees on returns, ended relationships with many shopping Web, started selling returned merchandise only over the web, not in the same store where it was returned, policies all designed to thwart the devils.

It’s a high-risk strategy, given the possibility for bad PR, loss of some chain-wide efficiencies, and overhead costs that run 1-2% higher at pilot stores. But, Best Buy is rolling out the strategy across the entire chain.

I should have been a more aggressive buyer of that flat screen TV last year.

As always, we can’t provide a direct link to Wall Street Journal articles, but will be happy to send a copy if you email us via the Feedback button below.

Is shedding unprofitable customers a winning strategy? Does your company know what customers are profitable or not, let alone do anything about it? What do you think of Best Buy’s strategy?