Subscribe to Entrepreneur for $5

Survival Strategies

Are Problem Customers Holding Your Firm Back?

Opinions expressed by Entrepreneur contributors are their own.

Provided by

Is the growth of your new business slowed by one or two bad customers? Here's how to get those clients off your back so you can focus on generating greater profits.

Marj Vincent decided 15 years ago that some customers aren't worth the trouble.

Her computer and was struggling with large clients who demanded cut-rate prices in that low-margin industry. The customers ate into her profits so much that she decided to dump the large accounts and serve smaller clients with technical support and more-sophisticated products, such as phone systems and digital-surveillance equipment.

The lessons she learned about unprofitable customers didn't stop there, however. Her Pittsburgh-area company, VAI Computerland Inc., makes it a policy to regularly identify and winnow out problem clients -- customers who habitually pay their bills late, for example, or need an inordinate amount of computer help. In weekly manager meetings at which profit margins are reviewed on every account, Ms. Vincent watches for repeat offenders who drive up her costs without adding something extra to the bottom line. For those found guilty, it's adios. And while she's at it, she may even lay off a few customers whose offenses weren't even of an economic nature. "We had a customer who physically threw a phone at one of our employees," she says.

"Sometimes they go away by themselves," Ms. Vincent says of undesirable customers. "Sometimes they don't." That's when they have to be fired.

Unprofitable clients can be a big problem for a . Being able to identify them and make them more profitable can be key to your company's success. But sometimes, even the best efforts fail. In that case, the key is to show a problem customer to the door in a way that doesn't make even more problems for your company.

Analyst Mika Y. Krammer from the research firm Gartner Inc., Stamford, Conn., notes that companies often react to a tight by cutting the budget or firing employees. But if more companies understood the information that's at their fingertips, she says, "they would certainly consider firing their customers."

How to Choose

Here's what you have to do. First, a few tips from Ms. Krammer on separating the wheat from the chaff.

  • Sort your customers by revenue, then look at a breakdown of the costs of serving each of them.

This tells you in black and white who your best and worst clients are. Most have mother lodes of information about customer profitability that they have never mined. Many don't even know which part of their company is the most profitable -- though it's easy to find out. Sometimes you'll find you're spending more than you expected on a customer that's worth less than you thought.

  • Look at what brings in business and what keeps it away.

That includes business hours and proximity to your customers, as well as your level of . Is your business known for low prices or top-shelf help? Trying to do both could tug your company in opposite directions, creating a situation where your business can't succeed. Plus, it will frustrate your customers and might drive away the ones you need to keep.

"Taking a step back seems like a superfluous exercise," Ms. Krammer says, but it offers a look at valuable information that small businesses can use to make themselves more profitable.

Second Chances

Once you've identified your best and worst performers, it's not necessary -- or even advisable -- to dump the laggards at this point. First, try sending them to boot camp. Tighten up your business practices, as follows.

  • Discontinue discounts.

Many large customers put in lots of small orders and then demand a price break, says Robert S. Kaplan, a professor at . Don't let them do it anymore. As Prof. Kaplan says, just tell the customer, "I'd like to continue to do business with you, but it has to be profitable for you and for me."

  • Make them pay for everything they get.

Many customers want special delivery options, packaging or features -- all of which is fine, so long as they pay for it. Small businesses often are so focused on maintaining customer relationships that they ignore a basic principle: Your price must cover the cost. Think of a restaurant when a customer orders lobster, Prof. Kaplan says: "You don't say, 'You can't order lobster.' You say, 'We'd be happy to serve you, but here's the extra cost for providing that service.'" Businesses have found customers will stay with them despite price increases of 50% to 70%, he adds.

  • Renegotiate the contract.

A small division of a Swedish company found that it wasn't making money on its largest customer, the appliance division of Co., because the customer kept changing order specifications, Prof. Kaplan says. often changed the quality of wire it wanted, as well as the quantity or delivery date, changes that more than quadrupled the handling costs of many orders.

Fearful of negotiating with a sophisticated giant, the small division nevertheless went to GE and opened its books, Prof. Kaplan says. "We value your business," the division told GE, even as it explained why the company was a pain to deal with. In the end, the division got GE to agree to a minimum order size and a surcharge for any changes, he says, and landed the largest contract in the company's history.

Drop Zone

Finally, if none of the above works, it may be firing time.

  • Unload the customer on another company.

That way you don't leave them in the lurch, and so avoid animosity. Maintaining good relationships is crucial for small businesses. Most small companies make their purchases from other small businesses, so reputation is critical, and nobody wants to be known as a company that fires customers. "It's really bad to poison that atmosphere," says Donald R. Lehmann, a professor at Columbia Business School. He adds that most small businesses operate in a limited geographic area, so if you make one person mad, you may anger others as a consequence.

If it works out well, the customer may even think you did them a favor. And here's another possible bonus: As Prof. Kaplan of Harvard says, sending your worst clients to another vendor will run up your competitor's costs -- leaving them to provide service at a loss.

  • Try getting customers to fire themselves.

One way to do this is to offer different levels of service and assign your worst customers to the lowest level. For your most profitable customers, send sales reps and technical help in person, says Ms. Krammer, the Gartner analyst. Give your worst customers phone-based support. You might allow a certain number of free calls, she suggests, and then charge for each additional call.

Ms. Krammer once was brought in by a Midwestern bank that, like a lot of community banks, was suffering from the high costs associated with customers who come in every day and ask tellers to perform small transactions. Simply cutting those clients off -- like companies who drop customers with high claim rates -- would risk lots of bad buzz and possibly a lawsuit. So, at Ms. Krammer's urging, the bank implemented tiered service, including a $2 charge for every in-person transaction. Those who didn't want to pay the fee -- the least-profitable customers -- "voted with their feet and left the bank," Ms. Krammer says.

  • If all else fails, be blunt.

"Confront it directly," says Mr. Lehmann; don't "irritate it to death." Everyone understands that some customers get priority, but you shouldn't just ignore an unwanted customer's phone calls or give them the cold shoulder. Ms. Krammer suggests doing it in person or over the phone. Doing it by letter could generate bad feelings, she says, and word will spread.

  • Don't renew the contract.

If you have to fire a customer before a contract runs out, try to base it on not meeting contract terms -- or you could face a lawsuit. Simply not renewing the contract when it comes up is "very respectable," Ms. Krammer says.

Or, as Prof. Kaplan suggests, at some point you just turn down the order.

Even when you fire customers, it doesn't always work. They apologize and make amends, but soon go back to their old ways. Some customers that Ms. Vincent fired came back like a boomerang when the vendor she referred them to went out of business, but not before thoughtfully referring the ex-customers back to VAI Computerland. Says Ms. Vincent: "Some of the customers that we have tried to fire are still here."

Copyright © 2004 Dow Jones & Company, Inc. All Rights Reserved

Entrepreneur Editors' Picks