What kind of advice is that?”
That’s what Steve, the CEO of one of my stuck client companies said to me when I urged them to get rid of some long-time customers.
Less can be more. Don’t be Stuck in a Rut. A company should ‘fire’ individual customers, groups of customers or entire product lines when the customers:
- have become marginally profitable or are in negative profit territory
- cause support costs to spike
- inflict a never ending sales cycle on your people
- unleash unreasonable demands (pricing, process, delivery) on the business
- have become entrenched in a dying segment of the industry
Why not fire them and give these ‘bad’ customers to your competitors? Each one of these 5 conditions is a story by itself, so I’m creating a ‘Fire Some Customers’ series of blog posts. This is Part I and it asks the most basic question about firing a customer, which is:
Why has a customer or group of customers become marginally profitable or moved into negative profit territory?
Four basic areas impact customer profitability. The thought process to analyze each of them is somewhat of a meandering drift through the river called your P&L.
Cause #1. Lower prices You have been forced to lower prices (or keep them the same after cost increases – more on that below). Your decision to drop or hold pricing is typically caused by competitive pressure or structural changes to your industry.
- Competitive pressure: Your competitive pricing decisions can either be: 1) thoughful, tactical decisions or 2) decisions based on panic (i.e. you failed the Stuck in the Traffic Needle Test) or 3) shooting from the hip. Are your pricing changes temporary or permanent?
Structural changes to your industry: Have your products evolved from a specialty to a commodity? Is your product now an ‘also-ran’? Are you subject to competitive product substitution? Maybe you are now Stuck in Another World. If there are significant structural changes, most likely they are permanent.
Cause #2: Product cost increases
Your product cost structure has been negatively impacted by rising material, labor or overhead costs, some of which may not be under your control and some may have been caused by your business practices. See above regarding pricing decisions: Are these cost increases temporary or permanent?
Cause #3. Both falling prices and rising costs.
What if you are experiencing:
- strong, competitive pressure
- major structural industry changes
- escalating product costs out of your control
Obviously, this is a tough spot and this mix generally causes gross margins to be in a steady, unsustainable decline. Typically, the combination of all these factors has a negative impact on the entire business, not just on one customer or a group of customers. Selective pruning of customers may not be possible, particularly in a process manufacturing operation that depends on minimum volume levels of production. This collection is most likely a permanent condition.
Cause #4: You don’t know why customer profitability has declined
Or worse, you don’t realize it is happening until it’s too late to change. This is not as uncommon as you might think and generally due to a ‘Just close the sale!’ approach combined with weak cost systems. In one ‘job shop’ company I worked with, once we matched the actual job costs with the job price quotes, the results were startling to the CEO. Some customers were fired, and the salespeople were retrained on how to quote.
Should you fire customers based only on the decline in their profitability? If you go through an analysis similar to the above and come to the conclusion that the changes are temporary and you are making good tactical decisions about pricing, then don’t throw them out. If you think the changes are permanent and the customers no longer belong to a protected class, say goodbye. However, as I said at the beginning of this post, the decision to fire customers may be influenced by a number of other factors (unreasonable demands, support costs, etc.). There can also be an emotional aspect to the decision to terminate the business relationship with one of your customers; they could be one of your Sacred Cows. Have you experienced any of these issues? Have you fired any customers and if so, why?
image credit: dianawest.net
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Jim McHugh has extensive experience working with emerging growth and middle market companies as an executive coach, strategic/ performance improvement consultant and director. Creator of the 9Stucks business diagnostic tool.