Can you improve customer service and profitability by Exorcising Demon Customers?

During the many customer service improvement workshops I have conducted I have often heard participating front employees observe the difficulties and dilemmas of dealing with those difficult customers that always require extra attention and firefighting and who never seem to have their own act together. The squeeky wheels get the grease, but these customers take up time and resources that could much better be spent on building the relationships with "good" customers. The question is often asked: Can't we fire customers?
I think so!

You have to keep a special eye on those customers you want to wean from your business. Deal with the bottom-feeders first to immediately free up additional resources to help support your more profitable customers.

And then there are the customers that on the surface seem important customers. But are they???

I like this [abbreviated] blog posting by Bruce Hunter of Lighthouse 360 who puts a great perspective on this issue. He also introduces the notion that using Activity Based Costing to establish the Cost To Serve is an enlightening practice to help make those difficult decisions about exorcising customers.

An Evil Myth

The unfortunate reality is that most demon customers, on the surface, seem like everyone else. In fact, they may themselves be unaware of their true nature. But take it from me: demon customers exist, you've probably got 'em, and even as we speak they may be sucking the lifeblood out of your company. The sooner you are able identify and exorcise them, the sooner your business will benefit.

Easier said than done, right? A while back, I stared across a conference table at a group of radio executives and wondered how to tell them that the last national account they had scored was a loser. These were hard-knock sales folks who knew their industry and knew how to chase down leads and convert them into time blocks sold. For years, their philosophy had been "any customer is a good customer." It was my unenviable task to educate them that this old truism was not, in fact, true.

Their situation wasn't unique. Years before, I had assumed the leadership of another business organization that had developed along similar lines. Culturally, the group had bought into the notion that the bigger the customer, the better. Not only did they bring in money, they also provided a certain cache simply by being a customer - that would, reasoned the groupthink, surely bring in even more big customers.

That organization had succumbed to an evil myth. Not only is bigger not necessarily better, in most cases we discovered that these mega-customers were actually bad for business. (I know. It didn't make sense to them, either - at first.) To prove it, I conducted a customer profitability study that forced us to take an inventory of all of our customer-related costs and where they were being applied.

I have often had the occasion to cast my eyes upward and give thanks for the folks from the finance department. This was one of those times. They performed a bottom-up exercise called "activity-based costing" that aligned the right costs to the right customers. Before that, costs had been averaged out across the customer base in the belief that it provided a decent view of the costs associated with each customer. As it turns out, that was a fundamentally flawed belief.

What emerged from this financial exercise was a very different view of the customer base. To widespread surprise, we saw that some of our largest customers were actually our "worst" profit performers. They sucked vital resources in terms of the people dedicated to the business, they were the most demanding in terms of price concessions, and they were quite low on business sustainability. They regularly required us to bid on projects, which resulted in more time and resources spent preparing the bid as well as the inevitable price concessions. (Think about it: when was the last time you were able to increase price and build margin through an RFP process?)