Professor Hemant Bhargava

Most corporations try to maximize the number of customers to drive growth and profits, but this is not always the case. A study by Professor Hemant Bhargava and his co-author, Assistant Professor Juan Feng of the Warrington College of Business at the University of Florida, contend that information technology service providers such as AOL are confronted with a more complicated and stratified customer base that requires a marketing strategy that separates profitable from less profitable customers—referred to as the “damaged goods approach.”

Bhargava and Feng’s paper, “America Online Internet Access Service: How to Deter Unwanted Customers,” was published in the journal Electronic Commerce Research and Applications. In the late 1990s Internet service providers such as AOL offered unlimited use to their customers, some more technologically savvy and less profitable than the more profitable, less sophisticated “average user.” AOL purposefully designed their connection software to be user friendly, yet inflexible, discouraging use by more savvy customers. By strategically reducing the product quality, AOL maintained profits by discouraging use by the more sophisticated customers. Netflix, the online DVD movie renting service, also has used this approach, according to Bhargava. Netflix customers who sign up for unlimited rentals and rent fewer than five movies a month are the ideal consumer (a majority of the company’s customer base). Those who rent more cause the company a net loss. To control such heavy users, Netflix lowered the quality of its services by developing a “throttling” technique: shipping movies from more distant warehouses to increase their time in transit. The net result is a reduction in service value for heavy users. Netflix has also modified its movie queuing algorithms so it ships lower-ranked movies to the heavy users. The result is that heavy users often abandon the service completely. Bhargava and Feng warn that the “damaged goods approach” must be used with caution because it can backfire if a company does not understand its consumer base and competitors. For example, AOL attempted the same strategy with its faster broadband service, but had to discontinue the offering due to a lack of consumer interest.

Professor Bhargava discussed the state of the technology industry in the Sacramento region on KXJZ Capitol City Radio’s “Insight” show on October 24. He joined Oleg Kaganovich, CEO of the Sacramento Area Regional Technology Alliance; Phil Tierney, manager of Intel’s IT Innovation Centers; venture capitalist Scott Lenet, managing director of DFJ Frontier; and other prominent business leaders. The radio show centered on the high-tech industry’s bright future in the region despite recent downsizing in the technology industry, including cuts at Hewlett-Packard’s facility in Roseville and Intel’s operations in Folsom. Bhargava said the downsizing by larger companies is part of a shake-out trend as competition heats up. Bhargava said technology companies focused on information services are experiencing growth overall, especially smaller, innovative ventures in the region that are leveraging regional advantages.