Busting the Myth that Firing Clients is Good Business
You've probably already heard of this approach or so-called solution to shrinking profits
. The idea is to get rid of clients that don't deliver your target profit margin. The problem children. The ones that make you heave a big sigh before picking up the phone.It's time to Bust the Myth that Firing Clients is Good Business
Don't Fire Your Difficult Clients. Rehabilitate Them!
Confused because you've heard that 20% of your clients actually make up 80% of your profits? So why wouldn't you fire under-performing clients?
You're right. Today roughly 20% of your clients probably account for 80% of your profits. So the other 80% could be termed as under-performing. In fact Pareto's Principle, commonly known as the 80/20 rule, or some variation on the theme, is usually given as the rationale for firing clients. To me that begs the question:
WHY are your clients not delivering the profit you want?
At least half the blame lies with you.
* Tomatoes fly through cyberspace *
Ok, out of your system? Flying vegetables or not, the reality is that you are as culpable as the client.
Let's say you buy a house plant. When you get home you stick it in a dark closet and never water it. Why would you be surprised if the plant dies? Of course the big difference with a client is that they can open the closet door and leave if they want. That's why there is enough responsibility to go around.
Here's an specific example. A potential new client, one that would be a big PR win, says they'll only switch to you for a 20% discount off your standard rates. You tell them I can't afford to do that, but they won't budge. In the end you cave in to their demands, thinking you'll make it up on volume, or that you can't afford not to win the business. The reality is that you'll lose money on this deal, and the client probably knows it.
The automakers went through this with their Tier 1 & 2 suppliers earlier this decade. Many of the suppliers went out of business. At the time GM, Ford and Chevy didn't care, they were hitting their numbers. However once only a few suppliers were left standing the shoe was on the other foot. The car makers didn't have options anymore, and the prices skyrocketed. We all know where this led in 2009, and both sides were to blame. Not a pretty picture right?
Here are the main reasons that an account is not profitable. Keep in mind its meant to assist you in evaluating your own book of business, it is by no means comprehensive.
Priced too low
Unreasonable or unattainable warranties
Takes up a disproportionate amount of your time
Wants extensive customization or exceptions to your standard product or service
Seems like I SHOULD fire them. Why wouldn't I?
At first blush, this appears to be what cold hard logic dictates. However there are two main reasons to put away the pink slips.
It is cheaper to rehabilitate an existing client than to locate and win a new client. If you don't have the cost to acquire a new customer at your fingertips, take a few moments now and ballpark it. The solutions I'm going to offer below should not cost you more than a few man hours to calculate and implement. Which one is higher?
The fallout with your profitable clients could be fatal. Think about it. What if you learn that your provider of a core service or raw material just fired 10 of their clients? Wouldn't your first reaction be, "What if I'm next?" The prudent course would be to consider alternate suppliers, perhaps even proactively switching. No matter how you try to spin it, cutting off clients without warning sends the wrong message to the market.
Now I'm sure you are wondering
How do I make them profitable?
The first step is to identify why you are losing money on the client.
Priced Too Low - Offer the client two options. They can pay the standard (profitable rate) OR you can keep the price the same and reduce the services to keep costs down. Cost to you is a few hours to discuss with the client and streamline the services the if necessary.
Unreasonable or Unattainable Warranties - Research the market to confirm your own internal standards. Then meet with the client and explain. Cost to you is a few hours research and time to meet with the customer.
Takes Up Disproportional Amount of Your Time - First be sure that the calls on your time are not due to a failure to deliver on reasonable commitments. If not, then limit service calls to a number in line with your industry, with a charge for those that go above. Cost to you is a few hours research internally and externally, pricing the service calls, and a meeting with your customer.
Wants Extensive Customization Offer the client two options. They can pay the the actual cost plus margin for any bells and whistles they are receiving, or they can select a standard product. Cost to you is time to price out the extra bells and whistles, plus a meeting with the client.
One final note. Be sure to wait until you are contractually able to make these changes. If you've included a price freeze for two years then you're probably stuck until it comes up for renewal.
Some of your clients will probably choose to leave. Whether its for lower prices, or more options. Don't be surprised if some come back in a year or two. In the meantime, their departure can be explained in a positive, proactive way to the rest of your customers.
So put away those Pink Slips. Let's go rehabilitate some profits!
Busting the Myth that Firing Clients is Good Business
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