Firing Customers For Profit

Businesses large and small generally work diligently to satisfy customers, and they’re frequently reminded that the cost of acquiring a new customer is much greater than the cost of retaining an existing one. Unfortunately many of those businesses fail to appreciate that each customer has an incremental cost, not just to acquire, but also to manage. It’s possible that an organization can spend more money to support a customer than what they get in return, which is obviously an undesirable situation.

Early stage companies are particularly susceptible to this kind of trap. In their eagerness to turn their ideas into revenue, they will often incur hidden costs in order to customize products and services for each potential customer. Any customer who is willing to pay looks like a good customer. Geoffrey Moore writes about this in his excellent book “Crossing the Chasm” (HarperBusiness, 1991). The danger is that the company loses economies of scale, leverage and re-use efficiencies, and ultimately the focus that defined the unique profit opportunity in the first place.

Unprofitable customers or segments can be hard to detect. It’s easy to add up the direct material cost of a single product configuration, but you also need to understand how much time your sales and support staff spend with a customer. Does your purchasing team have to manage unique suppliers? Does your quality team perform special tests or inspections? Your indirect labor may be spending a disproportionate amount of time dealing with requirements and requests from customers who squeak.

Unprofitable customers are not necessarily bad for the business. Moore writes about segments with “bowling pin potential” that may be a net loss today, but enable the firm to establish foundational processes, move up the learning curve, and leverage and grow in the future. These loss-leaders have long-term strategic value, but it’s important to understand and assess the investment in order to ensure the expected return.

Actually refusing to do business with a customer is extreme and could hurt your reputation, but consider ways to reduce the cost to manage a customer that isn’t currently providing a net profit or enables future profitability. The firm that fails to understand their “cost to serve” may find itself out of business despite many happy customers.