by Ry Moore

Created on: January 31, 2009   Last Updated: June 13, 2009

Customers are essential to a business. It would seem logical that the more customers a business attracts the greater its sales volume potential; and invariably its bottom line. This is sound business logic! So the question is why would a business find it necessary to fire any of its customers? Perhaps more so, how would this action improve its profit margin?

The accounting phenomenon: in order to make a profit one must incur an expense. Recall that profits are essentially revenue (sales) less total expenses. Having established that premise one must now acknowledge that every customer, whom the business services, creates an expenditure to supply that customer with what he or she needs.

Some customers generate much more costs to have their demands satisfied than their patronage contributes to the business' coffers. For instance, there are customers who spend much of the company's time making minor changes to their orders; or who make many small orders over a short period of time. Such customers use up additional man hours that could have been used to deal with the requests of 4 or 5 more organised clients.

Those man hours are spent redoing clerical work, reversing issued instructions, calculating new financial costs/charges, counselling "frustrated" employees, and increases wages where applicable. At the end of the day it may seem as if sales volumes are up but when the income statement is complete, we discover that the net profits are down.

The management phenomenon: reflecting on the Pareto rule of 80/20 contribution, smart businesses must analyse their customer base and begin to separate their clients into categories of significance. The current trend is such that customers who are willing to pay the cost of having their own needs serviced by the business are accorded the highest rating and thus the most sought after by the business' management.

The customers, who demand very little from the business but contribute significantly to its revenue, are also highly rated. These customers (including those above) are even offered a complimentary discount or special benefits [all minor costs to the business... sometimes it is the customer pays for these perks themselves] to ensure that their patronage is not lost.

The customers, who demand a lot from the business and yet contribute stingily to its profits, are the ones to be avoided even those they constitute about 80% of the general market clientele. It is this category of customer that a business may seek to "fire" and perhaps see an improvement in its real profit margin. However, as in any other instance one ought not to take the act of firing lightly. Firing customers should be a matter of last resort, to be use only after other measures for reducing their high service costs have been exhausted.

Learn more about this author, Ry Moore.
Click here to send this author comments or questions.