Firing an employee is one of the toughest things a manager will ever have to do. Even if the decision to end the working relationship is the right one, looking someone in the eye and telling them that they were so inadequate at their job that they no longer have one takes nerves of a steel.
Firing a customer? Well, that requires a different set of cojones altogether!
Yet, all the reasons you have to fire an employee – they never held up their end of the bargain, they were dishonest, they were more trouble than they are worth – hold true for firing customers as well. Sometimes, having their business is actually bad for business! Of course, this relationship – you know, one where they send you a nice fat cheque each month – might be a lot more difficult to sever.
So, how should you do it? More importantly, which customers do you need to give the boot to?
Identify the bad apples
A recent article in the MIT Sloan Management Review titled “Should You Punish or Reward Current Customers?” by Jiwoong Shin and K. Sudhir revealed some interesting findings about the average customer breakdown at B2B companies:
Your top 20% of customers are responsible for generating between 150-300% of your overall profits
You will break even on the middle 70% of your customers
You will lose money on the bottom 10% of customers
That research aligns pretty closely with the Pareto principle, named for the economist who developed the rule known formally as the Law of Maldistribution, which states:
In business, 20% of customers account for 80% of sales
Subsequently, 20% of customers account for 80% of your problems
Now you know, typically, what percentage of your customers will give you headaches or cause you to lose profits. Now you have to begin the task of actually finding out which of your customers is in that bottom tier.
What exactly does a “problem” customer look like?
Problem customers can take several forms. In our experience, the two most common ‘types’ of problematic customers are…
Customers that are difficult to deal with (relative to their revenue contribution)
Some people – not just in business, but in life – are just plain difficult to deal with. They think that just because they are paying you they are entitled to be a pain in the neck, in terms of harassing your sales reps, bothering customer service with trivial complaints or threatening to cancel over small matters. Sometimes, these customers – and the money they pay to your company – are simply not worth the amount of hard work that many of your employees put in toward making them happy.
To find out which of your customers are particularly difficult, check out a Quickbooks Analytics report measuring your Effort vs. Results. This report tracks how much effort is required for each $1,000 that customer generates. “Effort” is subjective to different companies and industries, but broadly includes task types in Salesforce – phone calls, online meetings, in-person meetings, custom configurations, etc. Basically, any task that went into selling and closing the deal, and then onboarding and keeping the customer happy. Each effort-based activity can be weighted accordingly – an in-person meeting should be weighted substantially more than a 5-minute phone call.
In this example above, IHS Inc. requires the most effort, and Nuveen North the least, despite the fact that both customers contribute roughly the same amount to your revenue stream. For comparison’s sake, Northeast Bancorp requires much less effort than IHS Inc., yet contributes far more revenue. If this company were identifying customers to “fire,” IHS Inc. would top that list, with Central European and First Trust following close behind as similar customers who require more effort than the amount in invoices they bring in.
Customers that don’t pay their invoices on time
Customers who cause a great deal of difficulty for your team are tolerable (for a time)…as long as they pay their invoices on time. Customers that don’t, however? Those are another batch of bad apples altogether.
Cash flow is the absolute lifeblood of any company, especially a small startup. When running the finances at a company, you can’t afford to have clients who brazenly ignore your 30-day payment terms and mail in their checks at their own leisurely pace. Clients who abuse the financial aspect of your relationship might be due for a “firing.”
The above Time to Collect Quickbooks Analytics report shows you how late your customers are in paying their invoices. Some customers like Teradata Corporation and Lender Processing are only a day or two late, on average, in their payments – a forgivable peccadillo. However, customers on the other end of the late spectrum – Apogee Enterprises and Huaneng Power – are late on their payments by a month, or more! That is unacceptable and if they don’t respond to your complaints and start paying their invoices on time, those customers might see their contracts voided and get “fired.”
Firing customers is an uncomfortable and undesirable situation, but sometimes drastic steps must be taken – if it’s not worth your employees’ time and effort, if the ROI is not there, it’s hard to justify keeping those customers around. Use the two reports above to identify which customers you should fire.