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Brick No117: If you fire unprofitable customers, what happens?
By Matt Weston, Friday 3 December 2004 On Monday, I was sat in a greasy spoon cafeteria with Emyr (my business partner, for the uninitiated). The place was an old haunt of ours from when he used to live in Clapham, South London. We were mulling over what would become the topic for today's brick - firing customers. The chap on the next table, who turned out to be a self- employed removal man specialising in "the fine arts", interrupted us. "I hope you don't mind me asking," he said."But what exactly is it that you do?" He'd been eavesdropping, and - what with 23 years of self-employment under his belt - he couldn't comprehend how anyone could ever talk about"firing a customer". But the reason we were talking about it, and the reason why I'm writing about it today, is because I regularly get questions on the subject. Generally the customer facing the bullet falls into one of two camps: (1) The unreasonable. If you can afford to fire consistently abusive, non-paying, and impossible-to-please customers, do it. But first, make sure you've not passed the buck. Blaming the customer is too easy. And if you decide you have no option, bear in mind the twin danger that (a) you lose the "customer is always right" mentality amongst your employees and (b) you end up with a vindictive ex-customer rather than an unreasonable customer. (2) The unprofitable. Some customers might carry a loss. If you have customers that are unprofitable, you need to work out why: (a) Usually it's a result of charging too low a price "just to make ends meet" in the early days. As I've said before, pricing low is the most catastrophic error small businesses can make. McKinsey reckon 80-90% of all poorly chosen prices are too low. (See Brick No58.) (b) Sometimes it's because you've taken on customers that are outside your niche or just a bad match for your business or your core skills. (c) For the big business, the reason many customers end up unprofitable is because sales people are more interested in revenue-based commission than truly profitable customers. That shouldn't be a problem for anyone on this list. (d) Lastly, perhaps you've used samples, money-back trials,"all you can eat" promotions, or loss-leader products, and have ended up with some customers who cost you more than they spend. As with firing unreasonable customers, you face a twin danger if you choose to give your unprofitable customers the heave-ho. First, and this applies particularly to customers recruited by method (d) above, you may cut off the very hand that delivered your most profitable customers. For sure, your local curry house may have the odd customer who eats his or her bodyweight in chicken tikka masala on "all you can eat" night. But if you water down the offer with caveats, don't you also lose half of your profitable customers? The cost of your freeloaders is simply a marketing investment that helps you acquire profitable customers. And second, it's hard to look at the past and say with much certainty which of your customers will be good and bad customers in the future. If you fire an unprofitable customer, you also burn the investment you made in acquiring that customer, and in the relationship you have with that customer. Even though you may be making a loss on the customer right now, you still have a loyal customer on your books. And in many cases that loyalty can be turned into profitability in the future. Remember to sign up: back to top |
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