Should You Ever Fire a Customer?

Should You Ever Fire a Customer?

Whether to fire a customer starts with assessing profitability and then evaluating five more factors.If yours is like most businesses, you work hard to acquire new customers and then hold on to them once you’ve got them. So why on earth would you ever wonder if you should fire a customer whose business has been hard-earned?

There are lots of reasons why it sometimes makes sense to fire a customer. The fact is, some customers just aren’t worth doing business with. The trick is figuring out which customers these are — and then letting them go in a way that doesn’t hurt your business financially or damage your long-term relationship with the customer.

Start with Unprofitable Customers

At the top of your list of “fire-able” customers should be unprofitable customers. Yes, there are some scenarios where you can justify keeping unprofitable customers for some time. For example, you might have a good chance of increasing sales to an unprofitable customer in the future and making them profitable. Alternatively, an unprofitable customer might be a loss-leader for your business — for example, having their name on your client list could help open doors to other profitable customers.

As a general rule, though, it doesn’t make sense to hold on to unprofitable customers for a long period. So the first step is to perform a profitability analysis to determine how profitable (or unprofitable) each one of your customers is. While the details of this analysis will differ from one business and industry to the next, you can get an idea of each customer’s profitability by subtracting your cost-of-goods-sold from the revenue you collect from the customer. If this number is negative, then you have an unprofitable customer and a business case to fire a customer.

Also, your profitability analysis should factor in the frequency of a customer’s purchases, the size, and complexity of their purchases, and their payment terms. Also, consider any special services that are offered. These might include things like extended warranties, expedited delivery or faster turnaround on special orders. There’s a cost to providing these services that should be factored into your analysis.

Other Factors to Consider

There are some other factors beyond dollars and cents that should go into your decision about firing a customer. Here are a few:

Customer service demands
Does a customer burden you and your staff with higher service demands than you would consider normal or reasonable? This is costing you not only in the man hours required to meet their demands but also in the emotional and physical drain that unreasonable (and sometimes rude and abusive) customers take on you and your employees.

Payment history
Does a customer consistently fail to pay invoices within the stated terms of your contract — or worse, fail to pay at all? Create and maintain current accounts receivable agings so you can identify these customers easily and, if necessary, fire them.

Deadlines & returns
Does a customer tend to consistently push deadlines right up to (or past) the limit, resulting not only in extra costs but also added stress and aggravation on you and your employees? Similarly, does a customer return more than what you would consider being a normal or reasonable amount of merchandise?

Discounts & price concessions
Does a customer always demand special deals and price breaks from you? Circumstances may dictate a discount here or there for a good customer, but those who consistently try to bleed you dry may not be worth holding on to.

Customer “fit” with your business
Maybe you have a long-time customer that was a good fit when you first started, but either they or your business has changed over time, and they no longer fit into your ideal customer profile. In this case, you might both be better off parting ways, thus freeing you up to concentrate on customers in your “sweet spot.”

How to Fire a Customer

So how do you actually take steps to fire a customer? This is important because you don’t want to burn bridges and have this customer speaking poorly about you in the marketplace. Ideally, it would be best if you let customers know face to face, rather than over the phone or via a voice mail or e-mail.

Be polite and use tact and professional courtesy. Explain your circumstances and the reason for your decision and offer alternatives, if possible, such as a referral to another company. Moreover, try to give the customer as much advance notice as possible, so they’re not left hanging out to dry without a key supplier.

Sometimes, having this conversation with a customer can be a wake-up call prompting them to change how they treat you and your employees or to pay their invoices in a timelier manner. If a customer tells you they are willing to make these kinds of changes, you might consider giving them another chance. For example, you could give them six months to demonstrate positive changes, after which time you can make a final decision about whether to continue working with them or not.

Concluding Thoughts

You work hard to acquire and retain new customers, so why would you think about getting rid of any of them? There are lots of reasons why it sometimes makes sense to fire a customer as, the fact is, some customers aren’t worth doing business with. The trick is figuring out which customers these are and then letting them go in a way that doesn’t hurt your business or damage your relationships with them. Experienced in assessing customer profitability on both client and services sides, an on-demand project CFO can team with you to identify customers you should consider letting go to boost overall profitability.

Arthur F. Rothberg, Managing Director, CFO Edge, LLC

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