You can fire bad customers, and probably should
Here’s the truth…
Not all customers are good customers.
Customers exist on a spectrum from the great to the gruesome.
Gruesome customers are the ones who take a long time to serve, spend very little compared to other customers and complain a lot. As a result they are a drag on your business. Both on profitability and your reputation.
But the idea of "firing" customers seems so counterintuitive to most people that it's rarely even considered, let alone actually done.
Why would you willingly let go of customers you fought so hard to acquire?
Well, the benefits really stack up:
- Often your worst customers have low or negative margins. By removing these customers your overall profitability will increase.
- Bad customers take time to serve, which you can free up to focus on serving and selling more to your good customers, and finding other good ones.
- Bad customers are often the ones that complain the most. By removing them you will have better reviews and higher ratings, which drive more business. Removing jerks and working with the right customers will make your business much more enjoyable to operate.
It makes so much sense I’m surprised it’s not more common to take a long hard look at customer lists every year. Here’s a simple exercise to help you focus on better customers:
Step #1. Collect customer data
Head to your CRM and/or accounting system and prepare the following data:
- Customer name
- Gross profit dollars
- Gross profit margin percentage
Export the data to Microsoft Excel or Google Sheets. I usually pull the data for each of the last three years. But do what works for you.
Step #2. Rank customers from best to worst
Now give each of your customers a score:
- Sort customers by the gross profit dollars generated from highest to lowest and give the top 20% a score of 5, the next 20% a score of 4, and so on until the bottom 25% get a score of 1.
- Next sort customers by their gross profit margin percentage from highest to lowest and give the top 20% a score of 5, the next 20% a score of 4, and so on until the bottom 25% get a score of 1.
Now each customer will have two scores, each from 1-5. Use these scores to rank your customers into the top 30% (customers with a total score of 8 and above), middle 40% (scores from 4-7) and the bottom 30% (scores 3 and below).
Step #3. Assess your options
Now consider how you want to use this information. Here’s one suggestion:
- Cut the bottom 30%
- Raise prices on the middle 40%
- Increase focus on serving the top 30%
This is a suggestion only. For example, depending on your business you might decide to cut the level of service to the bottom 30% rather than cutting them entirely. Or raise prices on the bottom 50% to try and lift their profitability, while focusing service on the top 50%.
Even if you decide not to act on this, you’ll have some valuable intel. Step #1 and #2 will tell you what your best customers look like. You can find patterns. You can go find more of them.
There you have it. You must do it carefully, and only think about "firing" bad customers after careful consideration and in the right way.
So, when's the last time you ranked and reviewed your customer list?
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