Thursday, November 15, 2007

What happens if you get rid of unprofitable customers?

One day I was discussing ways of increasing their profit with one of my clients. One of my recommendations to him was to “sack” some of his customers. (Those of you familiar with the 80:20 principle will know why!)

My client couldn't comprehend how anyone could ever talk about "sacking” 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 sack 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.

(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 sacking 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 sack 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.

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