When was the last time you let a customer go?
It sounds counterintuitive, but sometimes, saying goodbye is the right thing to do.
There was recently an interesting case study in the Harvard Business Review about a company that had started using activity based costing to assess customer profitability. The case raised the intriguing dilemma of whether the company in question should fire one of it oldest and “best” customers because they had become a loser in the past few quarters.
While we would all hope that every customer yields positive returns (unless you’re running a charity), the fact of the matter is that sometimes customers cost more than they spend. When this is the case, it can be hard to decide if you should cut your losses and move on or keep the relationship alive in anticipation of better days ahead.
Any decision made without all the facts – or at least as much information as you can get – is likely to be the wrong one. Knee-jerk decisions to dump a client in the face of a bad quarter, unusually high support costs or other potentially temporary issues may be more expensive in the long run. Investing the time to follow an intentional, carefully considered process to assess the true worth of the customer is a smarter course of action.
Customer value comes in many forms. Of course, there is the back and white, dollars and cents P&L. This seemingly simple measure of customer ROI can be deceptive because if does not factor in intangibles. Even with activity based costing. which allocates operational costs to customers relative to order volume, numbers can be deceiving.
What additional factors should you consider when weighing when to fire that customer? Here are a few questions to ask before making this important decision:
- If this is a marquee client, what are they worth in terms of the visibility and cache the relationships brings to your firm? Can you put a number on that?
- How valuable are relationships with executives of the customer in question? Are they leaders in your industry who influence others in the space? Will damaging those relationships hurt your business in the larger context of your industry?
- Is this customer the one who agrees, without fail, to beta test new offerings? To serve as a referral or provide endorsements and testimonials? These are important contributions to your future business, and may be hard to replace.
- Is this company more innovative than others in your portfolio? Do they alway say “yes” to the newest offerings, helping ou sign other, more reluctant accounts?
- What is the customer’s potential lifetime value? Is there upside that you can see with more sales over the long-term? If they struggling with a temporary setback it might be worth waiting a while, or even helping them out if there’s something you can do to preserve the relationship.
All of these items should be taken into account when assessing who to keep and who to let go. There’s no clear scorecard to tell you when to fire that customer, but if you take the time to look at the big picture, you’ll be in a much better position to make a sound decision.
Finally, I’d suggest making the customer evaluation process as consistent a part of your business as annual employee performance reviews or strategic planning sessions. A disciplined approach to evaluating your customer base will enable you to regularly prune underperforming customers that are not strategic assets, creating room to do more for those that are the ideal fit for your business.