Firing Your Customers

I have a client that is firing some of its customers.  I’m sure that got your attention!  I know: Why would a company turn away sales, especially in a soft economy?

The company is a business-to-business firm that serves the ultimate buyer through brokers.  The company considers the brokers its customers since the broker owns the relationship with the ultimate buyer.  The brokers submit business opportunities, and the company decides if it wants to bid on the business and develops a quote.  After carefully tracking its business for the past year, the company has identified about 10% of its customers that submit many opportunities but close very few deals.  The company spends a tremendous amount of time and effort bidding on opportunities from these brokers with very little to show for it.  Worse yet, the time spent on these customers distracts from the customers that close a high percentage of the deals they submit.

So after conversations with the underperforming brokers and efforts to improve the “hit” ratios, the company has decided to terminate relationships.  I think the company is doing the right thing.

When I was with a management consulting firm in the 1990s we offered a service called True Cost Performance.  A key principle of the service was the Rule of 50/5, which says that 50% of a company’s profits come from the top 5% of customers when stratified by volume.  In most cases, the percentage of profits from the top 5% of customers was usually more (and in some cases significantly more) than 50%.   And in just about every client, there was a person or group who rationalized keeping low-volume customers (it does not take much to service them, we think we can grow them, etc.).  Our consultants would analyze the reasons for keeping these customers and usually find that the rationales did not hold water.

The problem with low-volume customers is the complexity they create.  They take time and attention, which is time and attention not paid to the high-volume/high-profit customers.  Or you have to hire more people to service them, resulting in reduced overall profitability and/or overcharging high-volume customers.

Even though firing clients can make business sense, it can be a branding headache.  My client is taking the right tack.  It is not terminating these customer relationships capriciously, but it is providing the brokers with data about the relationship and giving them time to improve.  If the situation does not change, the brokers know the relationship will end.

If it comes to that, it is important that everyone agrees it is for the best.  The company wants to end the relationship with as much goodwill as possible.  The brokers will continue to operate in the industry and how the relationship ends will undoubtedly influence their perceptions about the company and the company’s  brand.

Relationships end: That is a fact of business.  Usually it is the customer who determines when the relationship ends.  But, if your company is making the decision to fire a customer, it is critical that you end the relationship as positively as possible to minimize any negative impact on your brand.

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