Firing your customer might sound like a really strange concept to you. Shouldn't we be thankful for any business we get? Isn't it all about sales value, i.e. the money coming in?

No, it isn't actually. As a profitable business you have to consider if it might be worthwhile not accepting certain customers or indeed firing them.

You need to remember that not all customers actually make you money. You might win a business at a very low price. If you take your fixed costs (e.g. rental of your premises), the variable cost (e.g. raw material), packing and delivery into account, you might want to re-think your decision. The actually margin (contribution) might be very low and you might make more money by not accepting the customer.

There is the issue of capacity. Using a simple example, you might have enough capacity to manufacture 100 chairs. Customer A pays 10 per chair, customer B pays 20. Wouldn't you want to sell to customer B? Of course you would. But what if you accepted an order from customer A for 80 chairs. Customer B wants 80, too, but you can only promise him 20, because you just can't produce more in time... This is called the opportunity cost (a term more frequently used when considering different investment options). By supplying customer A for a low price, you lose business at a high price because you can't supply.

However, there can be the situation that you want to accept these low priced orders. For example you have a lot of spare capacity. The price might not give you a large margin, but you have to pay for your fixed costs anyway. So the small margin you make can pay towards these fixed costs.

There are customers that can create you a lot of trouble. Bad debt, irregular payment, constant complaints that cannot be justified. In the past company's' often just "lived with it". But you don't necessarily have to do this. You have a right of ending a relationship with a bad customer. But you shouldn't take the decision light-hearted. A customer being told you don't want to sell to him anymore is not likely to take this well. Chances are he will go to your competitor, he will tell his friends and colleagues about your bad service and attitude, he will try to pay back for the "injustice" done.

In order to decide if you should ditch a customer, it is worthwhile to consider the actual customer profitability or to calculate the lifetime value (LTV). How much profit does the customer make you, when you consider acquisition cost, retention

• 1
• 2
• next page >>

---

Add your voice

Know something about How firing some customers can lead to greater revenue?
We want to hear your view. Write now!