How to Grow Your Business by "Firing" Customers

Once, when I objected to the terms of a client engagement, our COO explained to me that, "We're not in the business of turning customers away." That policy makes sense when you're thinking about maximizing revenue dollars, but it completely ignores the fact that some customers are black holes that swallow inordinate amounts of staff time and resources. Guess what? The client in question turned out to be a nightmare and the company went bust less than a year later.

My takeaway from that experience is that businesses are under no obligation to please everyone, and many who try don't survive long.

To move beyond the hand-to-mouth stage and bootstrap their way to profitability, entrepreneurs must eventually put some stakes in the ground and target customers who recognize the value they provide and who can be served profitably. It also requires developing the backbone to say "no" to clients who do not fit their business strategy. This may involve turning away customers who are overly price sensitive, come from outside the industries they serve, or require extra hand holding. The goal should always be to focus limited resources where they will have the greatest impact. Richard Koch in The 80/20 Individual describes this process as "finding the vital few."

Although it can be frightening to turn down business while you struggle to meet expenses, your startup will function more effectively when everyone is pulling in the same direction. This occurs when your sales and marketing teams stop chasing marginal clients and devote all of their attention to serving the needs of your target market. Focusing on the right set of customers has some important advantages, including:

• Higher employee morale, productivity, and retention
• Better pricing power and margins
• Spare capacity to serve more high-value customers
• Lower customer acquisition costs and better marketing ROI
• More repeat business
• Higher customer satisfaction and loyalty

The best part of all? Those unprofitable, impossible-to-please customers will end up becoming your competitors' problem!

1. Institute a "No Jerks" Policy
The first customers to get the boot should be the ones that cause you the most headaches. You know the ones I'm talking about by name. They escalate even the smallest issues into major crises, run roughshod over your employees, and expect to be treated like royalty while paying rock-bottom prices.

Life's just too short to waste time on people who demoralize your company, so do yourself a favor and find some better customers. Get out of the "we're here to please everyone" mentality ASAP.

2. Get Your Cost Accounting System Under Control
Once you've taken care of the low-hanging fruit, the next step is to improve your financial reporting systems to get a better picture of the true cost of serving customers. This generally involves finding a rational way to allocate fixed overhead expenses across your existing accounts. Several different cost accounting methods are popular, including traditional costing, activity-based costing, and throughput accounting.

3. Use the "Magic Matrix" to Rank Accounts by Profitability
The "Magic Matrix" (developed by Shapiro and Byrnes of the Harvard Business School) is a spreadsheet with products arranged along one axis and key accounts along the other, ordered by total revenues. The cells where the two axes intersect can contain almost any sort of information, but account profitability is most relevant for our purposes.

For many organizations, this exercise is a real eye opener, offering the first chance to view profitability at this level of granularity. The matrix will very likely change your perspective on which products and accounts are generating the most profits for your business.

Once you've ordered existing accounts by profitability, Holden and Burton in Pricing with Confidence recommend eliminating the bottom 5%-10%, but how do you actually go about "firing" customers?

If your business is transactional in nature, getting rid of bad customers may be as simple as adjusting your prices, marketing, or business policies to attract customers for whom you can provide greater value. The same applies to relationship businesses with a few extra caveats.

The most important thing is not to burn any bridges. Explain to the customer why it no longer makes economic sense for you to continue to serve him, but leave open the possibility of renewing the relationship in the future. You may discover that some clients will gladly accept new terms when the alternative is finding a different vendor. This is clearly preferable to severing the relationship, but you should be prepared to walk away if the customer refuses to budge.

If you must part ways with a customer, try to do so on good terms. (You may still want a reference.) It's always helpful to recommend another company to service the account and to work with the new provider to ensure a smooth hand-off.