Martin Perelmuter knows how to deal with demanding people. As president of Speaker’s Spotlight, a Toronto-based speakers’ bureau, he has represented everyone from artists to astronauts. But one day a few years ago, Perelmuter found himself pushed to the limit. He arrived at an event right before his client was to speak to a group of 500, only to find the speaker bellowing at the event organizer. Dissatisfied with the room and the AV equipment, the client unleashed a verbal assault that reduced the organizer to tears. “It was pretty tense,” recalls Perelmuter. “He was supposed to speak in half an hour, and he was throwing a fit.” Luckily, the client, a “well-known media entrepreneur,” went through with the speech and the audience was none the wiser. Still, that evening, Perelmuter faced a tough decision: should he put up with the abuse to preserve the $25,000 to $50,000 in annual commissions the speaker would generate? Or should he dump the client?
Though it may seem counterintuitive, letting customers go can help your company grow. That’s because some customers, even those who pay fully and on time, can be a drain on your business. If you’re like most business owners, you have a few marginal customers who draw your attention away from more profitable accounts. You might even have clients that cost more to serve than they pay for your product. The solution, however, involves more than identifying the right customers to cull and building up the courage to say, “Thanks for your business, but we don’t want it anymore.” Dump a paying customer without tact and diplomacy, and they could turn into your arch-enemy.
Perelmuter chose to cut ties with his cranky client. Besides the explosion, the client was hard to reach and had repeatedly tried to boost agreed-upon fees. “We realized there would be financial loss,” says Perelmuter, “but whatever we would gain by booking him would be counterbalanced by the efforts it took to deal with him.” He adds that the move protected the firm’s reputation and made employees happy.
Robert Bracey faced the same kind of hard decision when he acquired his current firm, Quartet Service Corp., in July 2002. At the time of its acquisition, the provider of outsourced IT and telecom services was growing exponentially on the top line, but bleeding on the bottom. To stanch the losses, Bracey performed a rough cost-benefit analysis on each of Quartet’s customers; within two months, he cut 10 of the worst performers, representing 7% of his total clients.
One client, for example, cost Quartet $65,000 a year to service, but paid only $42,000 in annual fees. Bracey bared the numbers in hopes of saving the relationship, but when the client refused to pay more, Bracey cut him loose. The decision was based not only on margins, he says, but a “full-cost accounting” approach that also weighed the costs of stress and staff turnover from dissatisfaction.
After trimming, Quartet prospered. “We went from losing a huge amount of money to making money almost instantly,” says Bracey. Monthly profitability now ranges from 5% to 20%.
Deciding who to cut is easier if you conduct account reviews on an annual or semi-annual basis, says Richard Pridham, president of Agili-T Group Inc., a Montreal-based consultancy specializing in managing customer relationships. Begin by looking at both top-line sales and margins, and also by underlying support costs such as marketing, acquisition, customer support and administration. Next, evaluate the lifetime value of a customer. Today’s unprofitable customer may be on a high-growth curve leading to big profits in the future; or an unpleasant or unprofitable customer may be worth clinging to if it attracts other clients through word of mouth or comprises an impressive name on your client list. “It could be your flagship account in a new market that you’re trying to develop and you’re willing to live with some of the tradeoffs, like a loss leader,” says Pridham. Finally, don’t neglect to speak to your front-line staff, who can shed light on whether a client is more hassle than it is worth.
Get all that right, and your bottom line can grow. When handled correctly, firing customers can increase revenue as well. Bracey discovered as much when sales rose 50% in the year after culling his customer base, thanks in part to positive word of mouth from fired customers. Bracey explained his cuts honestly to clients, either in person or over the phone, then spent a considerable amount of time helping them locate alternative suppliers.
Perelmuter opted for the written word. “We were just so upset that we didn’t want to see him or talk to him,” he says. In a letter hand-delivered to the client’s office, Perelmuter diplomatically described the “bad alignment between our style of working and his,” thanked him and wished him well.
Both Perelmuter and Bracey saved themselves grief not only by acting diplomatically, but also by being swift. “Many companies try the attrition approach,” says Pridham, referring to the too-common practice of simply ignoring bad customers’ calls and hoping they’ll go away. “This makes the relationship even more acrimonious.” The result: an angry ex-customer, which can have disastrous effects on your company.
Instead of generating bad feelings by ignoring the problem or slacking on service, speak to the client personally. Senior management should be involved on both sides, says Pridham: “You don’t want your sales rep telling their purchasing guy that you don’t want to do business anymore.” Discuss your challenges and see if the relationship can be salvaged. If not, explain your reasons for letting them go. Your goal should be maintaining maximum goodwill — after all, even if you’ve just ended the relationship, you may want it back one day.
© 2003 Susanne Baillie
