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How to Fire Your Customers to Make More Money.

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Easily optimize your consulting profits by cutting complaining clients.

Running a business sometimes comes second to us as IT consultants and professionals. Most of us love the puzzle. Most of us love to help others. All of us have experienced an angry user. All of us have had a customer service nightmare that was not the result of poor management on our part, but rather the dichotomy that exists between the user's perception of computers being simple boxes...just like a microwave... and the IT consultant's view of the inside of the machine with its millions of moving parts.

The bottom line is that there are two types of users / customers. Those that understand and those that don't.

Those that understand pay their bills, and are the type of customers we like to work with. "Those that don't" can further be divided into subcategories. Those that understand the value you bring to the table and those that don't. It is this latter category that the rest of this article will focus on.

The Pareto principle (a.k.a., the 80/20 rule) states that 80% of your business will come from 20% of your customers. You must keep, coddle, and grow this portion of your business. They are the core. This is your top 20%.

The corollary to that states that 80% of your customers only represent 20% of your business. This is your bottom 80%.

Taking that one more step, 80% of your problems come from only 20% of your customers. That's 20% of the bottom 80%.

This means that 16% of your existing customer base is an acute drain on your resources, and actually costs you money, and may actually affect your bottom line and your ability to service your top 20%.

So, in order to make your business a more profitable business, and make your life easier and happier, you should be looking at firing the bottom 16% of your customer base.

"THAT'S CRAZY!" you say. Well, if done improperly, yes, it's completely nuts. But it works when done properly.

How to figure out which customers to fire

The first thing that you have to do is grade your customers. Each customer that you interact with should be rated A,B,C,D.

In order to do that, you have to have some type of criteria for grading them. Here are some example criteria:

A Customers:
Pay on-time (or early).
Have a recurring revenue component on their account (or a contract)
Pro-actively refer you new business at least once / quarter.
Never question the bill or ask for a discount (they trust you).
Are very polite, and respect the effort and time required to do the job correctly.
Listen to your professional advice without nit-picking or self-researching excessively.

B Customers:
Pay on-time.
Don't question the bill much.
Are very polite, and respect the effort and time required to do the job correctly.
Listen to your professional advice without nit-picking or self-researching excessively.

C Customers:
Don't refer business.
Do not look to build a relationship.
Frequently confirm or question the bill.
Always double check what you say by googling whatever you suggest even though they don't understand what it is.

D Customers:
Don't refer you anyone.
Constantly ask for discounts or complain your fees are high.
Constantly take your advice, then research on the Internet trying to go with cheaper equipment that might work rather than do it correctly with systems you know work properly.
Argue with you when you tell them what a solution is.
Monday-morning quarterback your decisions.
Pay late
Keep you frustrated so that you're thinking "I'm not going to make any money on this deal / project"

Categorize EVERY customer you have according to criteria similar to the ones above.

Once that is done, seek out the bottom 16% and monitor, in detail, and look at their accounts. Figure out what you make on an hourly basis by the time that you are done convincing them you are right, convincing them they need to pay the bill, and doing things over a second time "for free" or as "warranty work" because they cannot make up their mind what they want or do not have the ability to communicate what they want.

You'll very quickly see that although you are charging $150 / hour (see leew's great article, How Do I Know What to Charge as an IT Consultant?, on what you should charge) you are actually only making $75 / hour or $35 / hour for this bottom 16%.

That's not good business for you!

So what do you do about it?

The bottom line is that you don't want those customers any more. One option is to sell their accounts, preferably, but it's hard to do unless there is a contract to sell. Try to sell D customers that have contracts to a competitor because "we just don't have the capacity to handle any more business".

Except for selling them off, the easiest way to make the customer go away is to raise rates on them. Calculate out how much you would have to charge in order to bring up your actual hourly rate (the $75 / hour or $35 / hour we just calculated) back up to the $150 / hour it should be. In most cases, it will jump to $300 or $400 / hour.

Then, write them a notice stating that their rate is going to increase, and... oh by the way... because of frequent delinquency in remitting payments, we are now requiring you to pre-pay in blocks of time.

That bottom 16% will jump ship in a heartbeat. Especially the cheap ones.

Be prepared with a script to handle D customer resistance.

When your D customers whom you are trying to fire get notice that their rate has just doubled and that they are now required to pre-pay, you may get some angry phone calls. Train your staff with a script to prepare them to handle it. Equip your staff with the scripts and the truth that the customer is being fired because they are not profitable so that your employees are able to properly and professionally handle the issue.

An example script might be "Mr X, thank you for calling in about the change to your account. Unfortunately, the change on your account will be permanent. We understand if that affects the business relationship that we have, and if you are unwilling or unable to accept the new terms, we would be happy to help you transition to another IT provider."

Then make sure you charge them for two hours time that it will take for you to get the new provider up to speed. And make sure you get the money first!

So how much is this worth to me?

We just figured out that your D customers require two or three times as much time in customer service and maintenance than your other customers. Assuming that 16% of your customer base was taking up 32% of your time, this is time you can now spend increasing your business and increasing wallet share of your A customers. This is time you can use to spend on your C customers, encouraging them to become a B customer. Time you can use to make your B customers into A customers.

Bottom line, firing your bottom 16% of our customers will free up one-third of your time to increase your profits from the existing customer base that actually likes you, and respects the service you provide.

Bottom line, you've probably lost an A or B customer because you were too busy servicing a D customer.

D customers cost you money. Get rid of them to get more profits!
50
Comment
Author:DrDamnit
12 Comments
LVL 61

Expert Comment

by:Kevin Cross
You had me at hello, as they say.  Very nice title, it drew me in and followed straight through.  I was intrigued especially how you used pareto down to 16% of customer base to add some statistics but also strengthen the point that you are not advocating chopping the bulk of customers but the small fraction that is problematic and less profitable.  Nice work.

You have my YES vote above.
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LVL 54

Expert Comment

by:b0lsc0tt
I had to read this quickly but I liked the article.  The point you make about categorizing customers/clients and then being honest and upfront with the "D" ones works even if you aren't consulting.

I have seen the approach pay off in other industries, including a software development company whose customers renew annually.  In one specific case a renewal notice wasn't sent to a client who seem very unsatifisfied (over a 2 year period).  When the customer called to follow up on the missing notice the company was upfront about not sending the notice and explained why, emphasizing the fact earlier comments in many conversations made it seem the customer would not be happy continuing.  That action must have been a bit of a "wake up call" for the client to realize how they had worked with the company.  They did renew and have not been a "D" customer since.

There can be a variety of reasons a person would be in the D list but I believe most are something that can be corrected if they are willing.  The raise in price is a way but in some cases can cause other headaches or issues.  Certainly in the above case the company didn't want to charge more to just one customer but there is also no reason a company should overlook or put up with (indefinitely) those on the D list.  As you mentioned, eventually the A and B's start to suffer and that isn't good!

bol
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LVL 18

Expert Comment

by:WaterStreet
Very nice and thoughtful article.

It got my Yes vote above
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Expert Comment

by:easytouchcom
Brilliant article!

The title catched me, and I couldn't stop until every sentence was absorbed word by word.
As old and boring the pareto saying is, as fresh and eye-opening is your style to write.
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LVL 16

Expert Comment

by:Geoff Kenyon
Nice article, thanks
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LVL 33

Expert Comment

by:pgnatyuk
Simply great!
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LVL 18

Expert Comment

by:Ravi Agrawal
Very good article, it was worth the read.

Got my Yes Vote.

Ravi.
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by:NAMEWITHELD12
the truth
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Expert Comment

by:Patrick Matthews
Best Buy and some other retailers are trying this sporadically, or at least they were before the recession had retailers scrambling to keep revenue up any way possible.
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LVL 50

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by:Dave
A good article that I had intended to vote "yes" as being helpful.

I screwed up somehow, it registered a "no" vote. Humble apologies to what should have been a 100% record

Dave
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Expert Comment

by:mikebesurfing
Very Nice
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LVL 66

Expert Comment

by:Jim Horn
Wisdom from heaven.    Voted Yes.

Especially when sales leads come in and state in advance 'we're a nonprofit, and we get our revenue next September, do you have an appropriate discount?' so these engagements can be avoided in the first place.
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