If any one concern keeps many new small business owners awake at night, it might be the question of how to keep the customer base growing. And, knowing that acquiring each new customer costs about five times more money than retaining the existing customer base, you certainly want to do just about anything to keep each existing customer happy.
Unfortunately, the occasional customer might be wrong more frequently than right. Or, a customer simply might not be a good fit for your company. You need a good handle on deciding the hopefully-rare times when you need to let a customer go.
The Answers to Certain Questions Can Help You Make the Right Decision
It generally makes little sense to retain consistently-unprofitable customers. In many cases, however, you can find solutions to turn profits around without bidding customers farewell. Still, too many “yes” answers to the following questions can signal a costly customer for your business. If you cannot resolve issues like these, it might be time to release a customer.
Are they paying their bills?
Anyone can miss an occasional payment, but if you consistently provide goods or services that go unpaid in spite of polite reminder calls, it may make little sense to keep selling to that customer.
Are they too demanding?
Customer demands often help small businesses improve, so picky customers can be assets rather than liabilities. If too many special requests force you to operate at a loss, if your business is not equipped to meet them or, of course, if they’re blatantly unreasonable — and they reject reasonable compromises —perhaps it’s time to part ways.
Is “feature creep” a common issue?
Feature-creep (also known as scope creep) is a common issue for consulting contractors. For example, software clients often ask you to drop in one more feature, often at the last minute. But any type of custom contract job can be vulnerable. First, ask yourself if the contract language allowed for it. Fixed-bid contracts are particularly susceptible to feature-creep.
If your contract was not appropriately specific about deliverables, you might consider accepting the requested changes and negotiating a better contract before the next project. But, if the requests continue in spite of a tighter contract — and the customer does not accept additional charges — then you may want to end the relationship.
Are they disrespecting you or your employees?
If customers occasionally show anger or frustration when they perceive concerns over your products or services, then you need to ignore their tone and do everything possible to resolve their issues.
Still, you and your employees do not deserve constant abuse from anyone, including customers. When outright rudeness and insults are the norm rather than the exception, it can affect everything from productivity to employee retention. Perhaps it’s better to release these customers from their misery.
Make Decisions Based on Practical, Rather Than Emotional Factors
When considering divesting customers, you cannot let your emotions drive your decisions. You certainly don’t want to eliminate a profitable customer just because of some relationship disharmony. Similarly, you can’t afford to retain customers simply because you feel sorry for them, or you’re afraid of reducing your customer base.
Unfortunately, there is no fixed formula that you can apply to make this decision. There are, however, common factors that can point to the need to end the relationship. A Harvard Business Review from April, 2008 addresses the management of unprofitable customers. Based on interviews and other research, they explain that, while companies typically first undergo a clear analysis to determine if a customer relationship can be saved, the following are reasons for letting customers go:
- Profitability is obviously the primary consideration, but you should also look at metrics to assess customers’ values over their entire history, rather than just current profits. If you QuickBooks, you already have the data to conduct a number of profitability analyses.
- Capacity constraints may signal that the company-customer relationship is just not a good fit. For example, if customer demand consistently exceeds a company’s ability to produce, forcing you to overstress your employees, pay extensive overtime or pay to farm out work to other companies, it may be time to recommend a larger business to satisfy the customer’s needs (a good public relations move, by the way).
- A change in business focus is another reason to release a customer. Clearly, if you no longer make the product or perform the service that the customer needs, you need to send them elsewhere.
- Customers’ effect on employees is another consideration. When a customer’s treatment of employees is so intolerable to that it affects morale, profitability sometimes should take a back seat.
Some of these issues can be identified by looking at cold, hard data; however, many require you to find ways to objectively analyze subjective facts. But, they all have one important thing in common: you should always try to find ways to resolve issues before you hand a pink slip to a customer. Even if the customer is clearly at fault, it’s worth a potentially-uncomfortable conversation to resolve the issue whenever possible.
Still, when resolution is clearly impossible, it is often best to end the relationship sooner rather than later. Damon Gochneaur, Founder of Aspiro Agency, a digital marketing firm in Denton, TX, did not regret an early decision.
His team had already spent several weeks negotiating and scoping a client project. “On the kickoff call for the project, the client immediately began with scope creep and pushing the boundaries of what was to be delivered. After 30 mins of more pushing and conversation, I elected to disengage and fire the client on the kickoff call.” After spending time and money bringing the client onboard, Mr. Gochneaur made the right choice by cutting his losses.
Handling a Breakup Requires Finesse
From a purely practical viewpoint, it’s always better to part as friends. You do not want to leave yourself or the customer with anything less than positive feelings. Of course, you also have to consider that a negative ending can result in social media rants from particularly distasteful customers who are prone to poor behavior. Right or wrong, these rants can affect your company’s reputation.
There are ways to drop customers without dropping a relationship. Deliver the bad news gently, while focusing on the customer’s benefits to explain the reasons. And, rather than leaving them hanging, try to refer them to more suitable vendors or other alternatives.
After encountering a client that created massive problems across the board, Chris Post, owner of Post Modern Marketing, a web design and Internet marketing firm based in Sacramento, CA took client breakup finesse to a new level. He worked with his Project Manager to develop a plan to turn the project over to the client by providing detailed instructions and all source materials.
“The goal was to exit the relationship without leaving him hanging or creating bad blood, and we successfully fulfilled that goal. The client understood, asked us to take care of a few final tasks — which we did — and then we concluded our relationship.”
Mr. Post now uses that approach as a model during the times when he cannot continue customer relationships. Any small business can be well-served by following this example as well.