How to fire your customers
Cutting off paying customers sounds counterproductive, but it
can actually help you grow
PROFITguide.com (October/November 2003)
By Susanne Baillie
Martin Perelmuter knows how to deal with demanding people. As
president of Speaker's Spotlight, a Toronto-based speakers'
bureau, he has represented everyone from artists to astronauts.
But one day a few years ago, Perelmuter found himself pushed
to the limit. He arrived at an event right before his client
was to speak to a group of 500, only to find the speaker bellowing
at the event organizer. Dissatisfied with the room and the AV
equipment, the client unleashed a verbal assault that reduced
the organizer to tears. "It was pretty tense," recalls
Perelmuter. "He was supposed to speak in half an hour,
and he was throwing a fit." Luckily, the client, a "well-known
media entrepreneur," went through with the speech and the
audience was none the wiser. Still, that evening, Perelmuter
faced a tough decision: should he put up with the abuse to preserve
the $25,000 to $50,000 in annual commissions the speaker would
generate? Or should he dump the client?
Though it may seem counterintuitive, letting customers
go can help your company grow. That's because some customers,
even those who pay fully and on time, can be a drain on your
business. If you're like most business owners, you have a few
marginal customers who draw your attention away from more profitable
accounts. You might even have clients that cost more to serve
than they pay for your product. The solution, however, involves
more than identifying the right customers to cull and building
up the courage to say, "Thanks for your business, but we
don't want it anymore." Dump a paying customer without
tact and diplomacy, and they could turn into your arch-enemy.
Perelmuter chose to cut ties with his cranky client.
Besides the explosion, the client was hard to reach and had
repeatedly tried to boost agreed-upon fees. "We realized
there would be financial loss," says Perelmuter, "but
whatever we would gain by booking him would be counterbalanced
by the efforts it took to deal with him." He adds that
the move protected the firm's reputation and made employees
happy.
Robert Bracey faced the same kind of hard decision
when he acquired his current firm, Quartet Service Corp., in
July 2002. At the time of its acquisition, the provider of outsourced
IT and telecom services was growing exponentially on the top
line, but bleeding on the bottom. To stanch the losses, Bracey
performed a rough cost-benefit analysis on each of Quartet's
customers; within two months, he cut 10 of the worst performers,
representing 7% of his total clients.
One client, for example, cost Quartet $65,000 a year to service,
but paid only $42,000 in annual fees. Bracey bared the numbers
in hopes of saving the relationship, but when the client refused
to pay more, Bracey cut him loose. The decision was based not
only on margins, he says, but a "full-cost accounting"
approach that also weighed the costs of stress and staff turnover
from dissatisfaction.
After trimming, Quartet prospered. "We went
from losing a huge amount of money to making money almost instantly,"
says Bracey. Monthly profitability now ranges from 5% to 20%.
Deciding who to cut is easier if you conduct account
reviews on an annual or semi-annual basis, says Richard Pridham,
president of Agili-T Group Inc., a Montreal-based consultancy
specializing in managing customer relationships. Begin by looking
at both top-line sales and margins, and also by underlying support
costs such as marketing, acquisition, customer support and administration.
Next, evaluate the lifetime value of a customer. Today's unprofitable
customer may be on a high-growth curve leading to big profits
in the future; or an unpleasant or unprofitable customer may
be worth clinging to if it attracts other clients through word
of mouth or comprises an impressive name on your client list.
"It could be your flagship account in a new market that
you're trying to develop and you're willing to live with some
of the tradeoffs, like a loss leader," says Pridham. Finally,
don't neglect to speak to your front-line staff, who can shed
light on whether a client is more hassle than it is worth.
Get all that right, and your bottom line can grow.
When handled correctly, firing customers can increase revenue
as well. Bracey discovered as much when sales rose 50% in the
year after culling his customer base, thanks in part to positive
word of mouth from fired customers. Bracey explained his cuts
honestly to clients, either in person or over the phone, then
spent a considerable amount of time helping them locate alternative
suppliers.
Perelmuter opted for the written word. "We
were just so upset that we didn't want to see him or talk to
him," he says. In a letter hand-delivered to the client's
office, Perelmuter diplomatically described the "bad alignment
between our style of working and his," thanked him and
wished him well.
Both Perelmuter and Bracey saved themselves grief
not only by acting diplomatically, but also by being swift.
"Many companies try the attrition approach," says
Pridham, referring to the too-common practice of simply ignoring
bad customers' calls and hoping they'll go away. "This
makes the relationship even more acrimonious." The result:
an angry ex-customer, which can have disastrous effects on your
company.
Instead of generating bad feelings by ignoring
the problem or slacking on service, speak to the client personally.
Senior management should be involved on both sides, says Pridham:
"You don't want your sales rep telling their purchasing
guy that you don't want to do business anymore." Discuss
your challenges and see if the relationship can be salvaged.
If not, explain your reasons for letting them go. Your goal
should be maintaining maximum goodwill — after all, even
if you've just ended the relationship, you may want it back
one day.
© 2003 Susanne Baillie
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