Should You Fire Your Customer?

November 2011

Fire your client? In this environment? Maybe. More than likely you have at least one, probably more, clients or customers that are more trouble than they're worth. For example, there are those who purchase only your lowest-margin services or products; complain about price and always ask for a discount; argue about the bill, claiming short shipments or defective products, when you know that's not true; or have other issues.

While these customers provide additional revenue, they contribute little, if anything, to the bottom line. In some cases you actually lose money on their business. In addition, they often negatively impact employee morale by stressing employees.

This is a difficult environment in which to consider dropping a client or customer, but it could be in your best interest. Before asking the customer to take his or her business elsewhere, however, consider what the loss of the business might mean. Rank the customers based on these criteria.

  • Size of customer. At some point, the customer will be so large that the impact of the lost sales will have too much of an impact on the business. Consider your fixed costs. For example, Madison provides 20 percent of your sales and only 1 percent of your profits. On a profit basis you should get rid of them. But you'd have to lay off 20 percent of your staff, and you'll still have to pay rent on the unused 20 percent of the office space. While it may not make sense to fire the customer, you should start making an effort to replace him.
  • Credit risk. In the current environment, this one is critical. You may have good customers that want to pay on time, but have their own cash-flow problems. A credit risk is even more of a problem if the business carries a low margin. The problem is what do you do if he's already owes you a bundle? There's no easy answer.
  • Customer profitability. While analyzing each customer may not make sense, you probably have a good idea who will make the cut list. Take the customers on the list and rank them based on profitability.
  • Special services. Customers who require special services, extra time, etc., should be considered for a cut.
  • Production or service capacity. It probably doesn't make sense to boot customers who use excess capacity that would be difficult to sell. The issue is probably more important if you're a manufacturer with a production line that has high fixed costs.
  • Building (or retaining) expertise in the area. Sometimes you want to gain experience in a new or specialized market that could be more profitable than your regular business or allow you to grow. Work for a customer that could generate expertise and add to your resume for future sales should be considered valuable.
  • Cross-selling. You've got to analyze the customer's business in its entirety. It's not unusual that the customer brings in a good deal of profitable business along with the unprofitable component. If that's the case, you can't get rid of the customer, but you may be able to discuss the losses you incur. You may be able to increase prices or even convince the customer to accept a different product or service to replace the unprofitable work. 

    There's no rule of thumb here. It depends on the problem and the size of the customer. For example, if the problem is slow pay, for small customers you can just refuse to ship until they're paid up. The same approach may work for larger customers, if you have the leverage. Alternatively, you might try a price increase to offset the higher cost.

Sources: "Fire Your Customer?" Small Business Taxes & Management