What do you do if one of your largest and oldest customers is now one of your most unprofitable? That's the dilemma faced by Tommy Bamford, director of the fictional UK-based interior fixtures manufacturer Egan & Sons. Activity-based costing analysis reveals that Westmid Builders, a long-standing client of Egan's, has become a big drag on the bottom line. But Jane Oldenburg, a regional sales manager for Egan who has deep ties with the Westmid account, argues against dropping it. After all, Westmid has stuck with Egan through thick and thin, even as many of Egan's other customers turn to Chinese manufacturers. Besides, there's a publicity angle. Case author Robert S. Kaplan, of Harvard Business School, asks whether Egan should sever its 63-year-old relationship with Westmid. Commentary comes from Timothy J. Jahnke, of Elkay Manufacturing; Jacquelyn S. Thomas, of Southern Methodist University; and HBR's online readers.

What do you do if one of your largest and oldest customers is now one of your most unprofitable? That's the dilemma faced by Tommy Bamford, director of the fictional UK-based interior fixtures manufacturer Egan & Sons. Activity-based costing analysis reveals that Westmid Builders, a long-standing client of Egan's, has become a big drag on the bottom line. But Jane Oldenburg, a regional sales manager for Egan who has deep ties with the Westmid account, argues against dropping it. After all, Westmid has stuck with Egan through thick and thin, even as many of Egan's other customers turn to Chinese manufacturers. Besides, there's a publicity angle. Case author Robert S. Kaplan, of Harvard Business School, asks whether Egan should sever its 63-year-old relationship with Westmid. Commentary comes from Timothy J. Jahnke, of Elkay Manufacturing; Jacquelyn S. Thomas, of Southern Methodist University; and HBR's online readers.

Companies spend billions of dollars on direct marketing, targeting individual customers with ever more accuracy. Yet despite the power of the myriad data collecting and analytical tools at their disposal, they're still having trouble optimizing their direct marketing investments. Many marketers try to minimize costs by pursuing only those customers who are cheap to find and cheap to keep. Others try to get the most customers they possibly can and keep all of them for as long as they can. But a customer need not be loyal to be highly profitable, and many loyal customers turn out to be highly unprofitable. Companies can get more out of direct marketing if they see it as a single system for generating profits than if they try to maximize performance measures at each stage of the process. This article describes a tool for doing just that. Called ARPRO (Allocating Resources for Profits), the tool is essentially a complex regression analysis that can estimate the impact of a company's direct marketing investments on the profitability of its customer pool. With data that companies already gather, the tool can show managers how much to spend on acquisition vs. retention and even what percentage of their funds they should allocate to the different direct marketing channels. Using the model, companies can easily see that even small deviations from the optimal levels of customer profitability are expensive. The tool can also show that finding the optimal balance between investments in acquisition and retention can be more important than finding the optimum amount to invest overall.