Firing your bad customers

The Pareto Principle: the vital few and the trivial many.

Over a century ago, in 1906 to be precise, Italian economist Vilfredo Pareto noted that in his own garden, 80% of the vegetables in his garden were found on 20% of the plants. Surprised by the seeming disparity, he researched to determine whether the same ratio would apply in areas beyond his little plot. Much to his surprise, he discovered that 80% of the land in his native country was owned by 20% of the total population. Pareto’s work remained relatively obscure until, in 1941, Joseph M. Juran discovered Pareto’s work and found that the same ratio was applicable to manufacturing quality control issues, where 80% of manufacturing quality problems were the result of - you guessed it - 20% of the manufacturing processes. Juran described the ratio, which he dubbed The Pareto Principle,¹ as “the vital few and the trivial many.”

Fast forward seventy years, and we find that the Pareto Principle applies not only to gardens, land barons, and manufacturing, but to the customer lists of almost every business. In short, 80% of the customer headaches that most businesses face come from only 20% of their customers. Unlike manufacturing, however, where even problematic processes are generally essential to the whole of the manufacturing effort, most businesses can and should strive to simply eliminate the 20% of their client base that causes such a disproportionate percentage of their problems. Face it; if your company is spending that much of its customer service time on such a small percentage of your customers, your customer service costs, as a percentage of your cost of doing business, are eating up a grossly disproportionate percentage of your profits. And you are in business to make a profit, right?

So what can you do about that troublesome twenty?

Perhaps the best approach is the one that comes to mind every time you have to deal with a “repeat offender”: fire them! It might sound like a pretty hot-headed (and even self-destructive) thing to do, but your business would be much better off focusing its energies upon those customers that you could actually satisfy without having to continually go back and re-do things on a regular basis.

Of course, the decision to fire a customer is not one that should be taken lightly; nor should the decision be based upon momentary frustration or, for that matter, any emotion-based reason. Perhaps the best way to determine which customers you would be better off without is to establish a “Pareto file,” where particularly troublesome situations are documented and archived. If your organization is a medium-to-large operation, it would be a good idea to have your sales, manufacturing, quality control, and customer service departments each initiate their own individual Pareto files, then for the departments to compare notes during regular meetings. The ultimate decision as to which customers to eliminate must be made by upper management, of course, if only to prevent personnel in one area from acting upon some acutely frustrating situation, or to prevent dropping a customer whose account is critical to the bottom line, or whose future business could represent a significant percentage of the company’s growth or long-term health. Obviously, these are factors with which the CEO, CFO, or COO would be most familiar.

Making the final decision to fire a customer is the easy part.

Actually doing so without burning bridges or negatively affecting your company's reputation and standing in the industry is much more difficult. As much as you might be tempted to simply tell a customer that he or she just isn't worth the grief they cause, restraint and diplomacy are crucial. And there are any number of justifications you can offer, some of which might actually be genuine. Perhaps your operation is at a near-capacity level already, and the production the difficult customer requires places excessive stress on your organization. No need to expound upon the stress factors. As an act of good faith, you could always recommend another company that might be able to better meet your customer's requirements. Of course, it might also constitute an act of good faith not to refer the problem customer to anyone with whom you have a good relationship, or at least to be forthcoming (if diplomatic) in letting the referral know why you are deferring on future work with the customer. It can be a delicate dance, but it is reasonable to assume that anyone who has built and/or manages a successful business knows the steps by heart.

Beyond merely making your operations more efficient, eliminating your most troublesome customers will actually be perceived by employees as a vote of confidence in their judgment and a commitment to their job satisfaction. Your employees will know that you are listening to them, and that you not only want to make them more efficient, you also want to make their professional environment more enjoyable. That alone can be an even more powerful incentive to employee productivity than is a bonus or a raise. When you fire your worst customers, you:

If there's a negative in this equation, it is more than compensated for by the positive effects. So get going. Evaluate your customers, see which ones are more of a drain than an asset, and fire them.

¹ Quality Control Handbook, Juran, Joseph M., New York, New York: McGraw-Hill, 1951, 2nd edition, 1962, 3rd edition, 1974, 4th edition, 1988, 5th edition, 1999