Fire Bad Customers

Fire Bad Customers? Are you crazy? It’s hard enough to get customers, why the hell would you fire them?

We all know this, not all customers are created equal so fire your bad ones.

I recently worked with two CEOs who were complaining about their customers. In one instance the CEO was asked to submit a proposal to an existing customer who was applying pricing pressure. When I asked him why this customer was so important to him, he said they represented about 40 percent of his company’s gross revenue. Upon further digging, I found out that the 40% revenue customer only produced 2% of his profit. It became clear, that: 1) winning this barely profitable customer at a discount might be losing and, 2) that there needed to be a methodology to evaluate the value of a customer.

I’m a student of the human mind and how we often make bad decisions. I know that if we go with our gut, we are just as likely to be wrong as we are to be right.  Studies show that even the best statisticians make poor statistical judgments when they’re pulling answers out of their butts.

The idea of good and bad is an abstraction. Humans make decisions with the same part of the brain as reptiles, the so-called reptilian brain. Reptiles don’t deal well with abstractions. To make better decisions one would be better served to break down good into its component parts. What does good mean? In the case of a customer, there are several measurable factors that are not abstractions. Are they profitable? Does your team hate working with them? Do they pay their bills? By evaluating each factor, one can make a better decision.

If CEOs formalize an evaluation process, if they’re intentional about which customers to chase, which to ignore, and which to drop… they’d be better off than seat-of-the-pants decision-making.

Fire Bad Customers? Why?

1. Opportunity Cost – supporting them comes with an opportunity cost, they keep you from chasing good customers
2. False Health Signal – having lots of customers and lots of revenue (even money-losing revenue) gives a false sense that your business is healthy
3. Growth Limiters – supporting difficult, hard-to-support, profit-less customers is bad for morale and limits growth

This leads me to this advice, create a system to evaluate customers. Back-test it on your current customers. Then use it before you decide to chase a customer.

Here’s an example of a customer evaluation using weighted factors to determine a score. In this example, Customer A would be a great customer and Customer C is a fire bad customer poster child.

Now let’s look at C, maybe before I fire that guy, I give them a new proposal that drives the profitability up to a weighted score of 15. That would provide an improved score of 49.  That would make them salvageable.

If you evaluate your prospective customers by using a methodology like so, you would improve your bottom line. For instance, you might raise their price and still flip the unprofitable to profitable. or you might specify coachability requirements and get the customer to agree to meet these requirements which would make them less of a resource drain. Raise the coachability score or fire bad customers.

Bottom line… fire bad customers.  Do you have bad customers? You don’t really know if you haven’t evaluated them systematically. Should you bid or no bid for that prospective customer? You don’t know if you haven’t listed and weighted all the traits that make a customer good or bad.

So… what are you going to do? Want to talk about the quality of your customers? Try a complimentary executive coaching call by scheduling here.