BrainTrust Query: Should You Fire Your Customers?
Commentary by Mark Price, Managing Partner of M Squared Group
Through a special arrangement, presented here for discussion is a summary
of a current article from Cultivating Your Customers, the M Squared
Group blog.
In a recent post on The New York Times website, in the section called “You’re
the boss — the art of running a small business,” Jennifer Walzer,
the owner of a company that provides corporate data backups, wrote a post suggesting
that her smaller clients might have to be “fired” in order to provide
more focus on larger clients and prospects. “As much as I would like to
continue to take care of our small clients, we might have to start introducing
them to other options,” she wrote.
Jennifer runs a high-touch company that provides extensive support services
to all her clients, even the small ones, and she is concerned with her limited
staff, that she may be expending too much energy on clients that cannot help
her achieve her growth objectives. These concerns are not to be easily discarded.
But the issue that she raises is a broader one that is applicable to customer-driven
companies across industries: “What should I do with my lower-revenue
or margin customers?”
Traditionally, the playbook has read that you should “fire” or “de-market” your
lowest value customers. “Fire” usually means disconnecting, unsubscribing
or refusing to serve customers who do not meet specific financial criteria. “De-market” is
a bit more subtle. It means to cut off all voluntary communications with a
customer to discourage them from revisiting your business.
Remember, your greatest
opportunities lie not just in building and maintaining relationships with your
best customers, but also cultivating relationships with those who have potential
to deepen their relationship with you. As a result, here are three questions
you might want to ask before you break off relationships with a customer:
- How strong is my relationship? How many times does this customer
do business with me? Do I have a conversation going with them? Â Low-value,
highly frequent customers with good interaction patterns often make good
recommenders for your business, extending their value threefold or more.
- Is this customer in a strategic business for me? Sometimes low-value
customers can help provide the volume necessary for a company to build the
skills and scale in a business that will benefit the company over the long-term.Â
- What don’t I know about this customer? Sometimes, the information
we don’t know can be as vital as the information we do. One of the
key metrics that is hard to obtain is whether or not the customer is actually
spending a lot in the category, but just not with you. Often if you have
customers with low revenue or margin, and all the rest of the indicators
suggest they should be best customers, they may be, just not for you.
Discussion Questions: What criteria should guide the decision of a retailer
or a business to “fire” or “de-market” lower-revenue or
margin customers?
Great advice. Not all business is good business. When resources are limited there needs to be consideration for both sides that there is a win-win relationship. In some cases, the needs of the customer may outstrip the time and energy the provider has available. Some larger clients may find your services no longer needed and you may need to change your customer base on anticipation of future needs and fill the pipeline with newer, smaller clients.
Clients/Customers are all important. This is not to say they are not. But there is no harm in rewarding more frequent customers with better rewards, or targeting certain clients with services that have residual benefits that add to your overall business in lieu of others.
What a great way to get really, really bad publicity! As I recall, Best Buy made an attempt to fire some customers a few years back. A lot of media hubbub ensued.
Plus, the example cited in the article was a bit odd. It’s a B-to-B business that could easily solve its problem by raising prices.
In fact, for B-to-B companies, bigger is not always “more profitable.” Sit down for a drink with Walmart suppliers and ask how many would stop doing business with the company if they could. The answer is “more than you think.”
There are retail cherry picker customers. Usually you can find them clustered by stores. How do you solve that? That’s why God (and computers) made localized assortments.
In other words, my answer to the question of what percent of customers should retailers fire in the age of social networking and media madness is: “none.”
One of the principles of effective Customer Relationship Management (CRM) is identifying your “platinum” or “gold” customers…the ones who shop your store or site most often, and whose average transaction drives a lot of your profit. Maximizing revenue from your best customers does require the self-discipline to identify the other side of the equation.
Every business has customers who are more trouble than they are worth…cherry-picking the least profitable items in your assortment, not demonstrating any recency or frequency of shopping behavior, and otherwise draining your operating margins. It’s tough to deliberately “walk business” in a slowdown, but it’s worthwhile making sure your marketing and customer service expenses are focused on the most profitable consumer.
There is a significant difference in being a retailer (who by very definition are involved in selling commodities directly to consumers, i.e., the public) and a business who sells to other businesses. I am not sure that a retailer can “fire” a customer. True it can ban unruly or other customers from its locations, but fire them because they just purchase low margin items? If that were true, many customers would not be able to shop at a lot of locations. Frankly, we often pantry load at the grocery store when we find a great value. Should we be banned from the store?
In a business to business setting things are different. You don’t have to do business with others, but I agree before you fire that low margin customer you should ask the questions listed. My first question is why are they low margin? Is it because you structured what they purchase incorrectly–too low a price for too much work, etc? Do you truly understand their needs? Is it because you failed to sell them additional services? Are they part of a network that can result in additional sales?
The questions any business should ask before voluntarily giving up a customer are many. I strongly suggest that you examine them all before firing your customers.
A customer is a terrible thing to waste. I think it’s easy to rationalize firing customers that don’t contribute much to the total revenue picture but a lot of times that is short sighted. But beware the lure of the large customer! Sure it can be argued that it’s as hard to land a large customer as it is a small one, and you can usually rely on the big ones to pay better. The flip side is that they have the tendency to suck all of the oxygen out of the room and your company, and when the inevitable downturns come around, the big guys will cut you off without a second thought.
What if that was your only customer? I believe the answer is to have a good mix of large and small in your customer base. Does it strain resources? Absolutely, but the needs of the small and large customers are often different, which will add depth to your offering and make you a more sustainable company over time. The moral of the story? Don’t put all your eggs in one basket.
Retailers rarely fire a customer because any and all sales are important. But sometimes the customer is too over bearing, has a record of returns, is rude or disrespectful of your people, and they deserve to be fired.
If you put the shoe on the other foot and ask what retailers should vendors fire? They’re demanding, have numerous chargebacks, their way or the highway….
Many would have Walmart at the top of their list. Would they actually fire Walmart?
Retailers (and companies in general) should only fire customers when all possibilities are exhausted. Rather, why not start a truthful dialogue with those customers and become committed to understanding value and contribution from a place of mutual respect and unbiased listening?
No business can be all things to all people. But in this climate, any customer deserves respect and presents an opportunity from which to learn more about how to be more relevant in the face of constant change.
Retailers don’t get to fire customers. Customers fire retailers.
Spending the same time, capital, and expense on marginal customers as on core customers is a fairly common experience. It is just sound business practice to periodically look at this balance and make adjustments to better align investment with the market that will provide the greatest return.
Mark provides a very good set of criteria for paring low-return investments. There is some preliminary work, though, that I think needs to be done before you start eliminating customers. This involves you and not the customer. You need to ask yourself some simple questions:
1. What is the business/value the company provides?
2. Is the market for this business growing or declining?
3. Can/will this product/service become obsolete?
4. Is the competition growing or declining?
In other words, you need to identify who you are, what you’re offering, and how big the opportunity is before you start reducing your customer base. Once you’ve done that, focusing on the core customer is just sound business practice.
There is one other caveat worth remembering, known as the Wal-Mart syndrome. The wholesale graveyard is filled with the tombstones of businesses that tied their fortune to one large company that went under when the large customer found a better alternative. Add risk of concentration to Mark’s list.
Agree with Jennifer. You don’t spend time on low-profit customers just like you don’t spend time on low-performance employees, yet that’s not how many businesses are run.
The squeaky wheels get the grease–rewarded–when it should be the best customers and employees getting rewarded. They are the ones making you money.
A few other comments here touch on this, but I want to underline the point: an unprofitable customer is not merely a burden–they are an opportunity as well.
Retailers should use frequent shopper card data as the springboard to try and shape their shoppers’ behavior. For example:
– Encourage larger baskets. Give shoppers with lower basket sizes an “aspirational” coupon, such as $4 off $40 for people who generally spend $20 – $30 in a trip.
– Encourage greater frequency. Give shoppers coupons with very short redemption windows to get them back in the store quickly (CVS does this very well with their ExtraCare offers). Shoppers who are in the store more tend to buy more.
– Fill category voids. Everyone buys toilet paper. If a shoppers isn’t buying it from your grocery store, then they are buying it from Costco, Walmart, etc. And they aren’t just buying toilet paper, they are also picking up milk, eggs, cereal, etc, while they are there. Find shoppers who are cherry-picking your departments and get them offers to shop the rest of the store.
– Adjust assortments to serve your best customers. When considering whether to drop an item, don’t just consider the sales of that item–also ask *who* is buying it. We’ve seen a retailer that was selling very few bottles of an ultra-high-end Extra Virgin olive oil. But it turned out, the shoppers who bought it were in the top 1% of customers. So when deciding which items to drop, that product was taken off the list.
Of course, there are many more examples than there is space to list here. The point is, before you “fire” a bad customer, see if you can turn them into a good one.
Once you have upgraded as many customers as possible, then, and only then, should you let the remaining unprofitable customers lapse. By targeting offers to your better shoppers and evolving assortments to favor your best shoppers, your stores will naturally become less and less appealing for the shopper who loses you money.
We are very slow to fire a client but on the rare occasion that it happens, it is usually due to a cultural issue. We had a client that was speaking to one of our junior associates and in the conversation cursed at him and then cursed all Americans and the way Americans do business. We felt it was time for him to do business with our competitors.
In almost all businesses, the most profitable business comes from the top 20%. The danger is that things change, there are no guarantees that the best customer today will provide the same value to the business tomorrow. Critical, strategic thinking about longer-term growth is required to focus resources, and provide selection/service options that meet expectations for current and future clients.
The true question here asks, is there sufficient margin of profitability built into the business to allow for radical market change and or removal? Companies that did not keep their eyes on the road to success and take care to ensure a maximized profit posture are gone or going to be gone. Transportation, construction, energy, banking, and insurance industries are the current focus of “failure conversations” but today’s economic depression is sacking the entire economy of the planet. China’s recent business reports concerning recent quarterly results demonstrate a worsening in the economies of the world with no end in sight.
There are no disposable corporate resources and therefore no effort should be made to produce for discounted rewards which will cause negative growth in the company’s profit, growth and stability. Poorly performing customers, like poorly performing employees, fire themselves. Management must simply finish the separation or suffer the consequences.
I agree with Paula on this one. The example is not applicable to retailers. Although I am not saying that retailers should use a “shotgun” approach to target every consumer (even Walmart doesn’t do that), I am saying that those consumers who spend less, yet are in the target audience should be maintained for a number of reasons. 1) It’s easier to keep customers than to attract new ones, 2) They are adding to your bottom line. Even if they cherry pick, 3) Those cherry pickers may in fact develop into more profitable customers over time if they sense a retailer appreciating their patronage (i.e., TRUE loyalty).
A smart guy once told me never turn away (or turn down) a customer–simply change the terms so that the customer becomes profitable to you–and if they turn down those terms, it’s their choice.
A retailer attracts “cherry pickers” by offering low margin or loss leader items. A retailer can stop “cherry pickers” by not offering low/no margin deals at all or by adding some restrictions–such as a minimum purchase, only with club card, et al.
A supplier allowing unwarranted deductions needs to change the game–either refuse the deductions and chance losing the business or advance your price to cover the deductions.
One thing that really caught my eye was the statement “may be expending too much energy on clients that cannot help her achieve her growth objectives.”
People are aware, I hope, that businesses exist to provide services, and success is the result of doing that well; in other words, businesses exist for the benefit of customers, not the other way around.
Of course I may be reading too much into the statement, and Ms. Walzer may be simply articulating what business she wants to be in…I hope that’s what it is.
Hmm, before you proceed to fire your small customers I’d advise two stops along the way:
1. The mirror.
2. The crystal ball.
The relationship might be in part your own doings. And secondly, you ought to be sure that your “big” customers view your company as being important enough not to drop YOUR business.
My father was a very successful property and casualty insurance broker. He had many clients, some of whom paid annual premiums of less than $20. It was a long time ago as you can imagine. My Dad gave out his home number (way before cell phones made us all accessible 24/7) and the customers would often call during dinner time. I overheard many of those conversations and took away some valuable business lessons. Here’s one of them.
The client was complaining that his premium had gone up about $2. For the next 10 minutes my father calmly and thoroughly explained why that would be.
The client then apologized profusely for taking up my father’s time for such a small amount. Dad told the client “Don’t worry about it. I wish I had 50 customers just like you.” “Really?” the client asked. Dad replied “Yes. The problem is I have 250 just like you.”
I have what is known as Ramey’s Rules of Retail. Two of them are:
1. Customers bring a cost to business; often they’re intangible. Price appropriately.
2. Worry about the 90% of your customers who will make you wealthy rather than the 10% who drive you crazy.
These are all good questions, but they should be led by the first and foremost question which is, “Does this customer promise profits to our company if we meet their needs?” For all businesses this answer must be a clear yes. Anything less than this should be a signal to stop doing business not only with this customer but also with this class of customer and often with this class of trade. First and foremost, companies are in business to create a sustainable profit. This often gets mired in the feel-good customer, or the easy customer, who does not deliver the level of profits that the company needs to sustain its model.
If you are in retail, you need to be customer centric. Yes, you may from time to time have high maintenance customers that demand a great deal of assistance without purchasing much from the business. The article brought up some great points about what other value a customer can offer. Referrals or advice in a specific market that you have not penetrated are two good examples.
Dumping a customer is bad business. If you truly don’t want a customer, be sure and work hard to find someone that does want their business. Stew Leonard’s has a great story about a customer that wanted their money back for milk she claimed was bad. When Stew Sr. argued with her she stormed out with the refund and said she would never come back. After doing the math on what that customer was worth over the next 10 years he realized what a terrible business decision he had made. Not to mention how many friends she shared her story with.
Far too often we think of clients in the moment and not over a period of time. Why not work to cultivate customers and help them grow. Their growth and success will ultimately come back and reward you 10 fold for the effort. And for the ones that don’t, consider it a cost of doing business.
I am one opposed to “firing” customers because they might be a low profit account. That is not the entire picture. Low profit is better than no profit. So as long as they contribute to the bottom line and not draw from it, they should remain part of the picture.
Now if the customer proves to be a liability, move them. No company is strong enough to keep a customer that is a drain on the assets, people, and capital of a company.