When To Fire A Customer
 By Lee S. Shaffer

“The customer is always right.” No doubt you’ve heard this mantra many times before. But is it true?

Many management experts are beginning to question its wisdom and actually recommend that companies fire some of their customers.

This might sound like heresy during challenging economic times like these, but it’s true: You might actually be better off not doing business with some of your customers.

Unprofitable Customer
The most obvious example is a customer who is unprofitable to your business.

There may be circumstances that justify keeping unprofitable customers for a limited time – for example, if there is a real possibility of selling them more products and services that would make them profitable in the near future.

But, it rarely makes sense to do business with a customer who is actually costing your business money.

To determine whether you have customers you should fire, calculate the profitability of each customer.

Profitability analysis differs from one company and industry to the next. But to get a rough idea, subtract the cost of providing your product or service to each customer from the revenue generated by the customer. If the number is zero or less, the customer is unprofitable to your business.

But there are factors beyond the cost-of-goods-sold (which are the actual material and labor costs involved in manufacturing and delivering products and services) that should be considered when determining profitability, such as:

• Customer service demands. Which customers burden you and your staff with higher service demands than you would consider normal or reasonable? They are costing you not only in the man hours required to meet their demands, but also in the emotional and physical drain that unreasonable customers place on you and your employees.
• Payment history. Which customers consistently fail to pay their invoices within the stated terms of your contract – or worse, fail to pay at all? Carefully track your accounts receivable so you can identify these customers easily and, if necessary, stop doing business with them.
• Discounts and price concessions. Which customers are always demanding special deals and price breaks from you? Circumstances may dictate an occasional discount for a good customer. But those who consistently try to bleed you dry may not be worth holding on to.
• Deadlines and returns. Which customers tend to consistently push deadlines right up to (or past) the limit, resulting not only in extra costs but also added stress and aggravation for you and your employees? Similarly, which customers return more merchandise than you consider to be a normal or reasonable?

Beyond Profitability
Other situations may also cause you to cut a customer loose.

For example, do you have long-time customers who are no longer a good fit with your business? Maybe they were a perfect fit when you first started out. But either they or your business have changed over time, and they no longer fit into your ideal customer profile.

In this case, you might be better off parting ways. You can refer these customers to a business better suited to meet their needs, thus freeing you up to concentrate on customers who match your profile.

Or, do you have customers who may have crossed over the line between demanding and abusive? Holding on to these customers can be costly in ways far beyond simply dollars and cents.

It communicates to your employees that it’s OK for some customers to be rude and abusive to them. In other words, it communicates that money is more important to you than your employees. Low employee morale and high turnover will likely soon follow.

Breaking Up
How do you actually go about saying goodbye to a customer?

You don’t want to burn bridges and have this customer speaking poorly about you in the marketplace.

Ideally, you should do it face-to-face, rather than over the phone or via a voice mail or e-mail. Be polite and use tact and professional courtesy. Explain your circumstances and the reason for your decision and offer alternatives, if possible, such as a referral to another company (if appropriate).



(Posted August 2008)

>>More Owner's Manual Articles