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The customer is always right, right? Wrong.
By Reed Richardson

Ordinarily, a statement like this might seem like heresy in the business world, considering all the time and effort spent pursuing and landing customers in the first place. But to Larry Selden, business professor emeritus at Columbia University, this is exactly the kind of radical approach more businesses should be adopting.

"This doesn't fit the way most managers run and measure-and thus think about-their businesses," he acknowledges in his 2003 book Angel Customers and Demon Customers. But Selden, who co-authored the book with Fortune senior editor-at-large Geoffrey Colvin, writes that based on their research almost every company "consists of both profitable and unprofitable customers-angels and potential demons. Some customers are making your company more valuable while some are draining value from it."



The costs from these "demon customers" can be staggering. In his book, Selden estimates the bottom 20 percent of customers can often generate losses totaling more than 100 percent of a company's profits. At the same time, many business experts note the existence of an "80/20" rule with regard to "angel" customers, whereby roughly 80 percent of a company's profits come from the top 20 percent of its customers. But the first step toward improved profitability involves differentiating between the "angels" and the "demons."

Perhaps the most effective way to do this is through activity-based costing. Rather than using traditional accounting methods that tend to distort cost information by heavily weighting labor and materials over support operations, the ABC method traces all costs back to individual product lines or services. Most small businesses make the mistake of only looking at how much an account or customer brings in, instead of assessing the their true net value.

Once you begin to determine your customers' true worth, then you can start to tier your services to match profitability, focusing greater support to your top level of customers. What to do with the bottom 10 or 20 percent of your customers, however, remains controversial. Some business experts advocate ruthlessly cutting those customers loose, while others, like Selden, believe you should at least attempt to "exorcise" those "demon" customers first, using tactics such as discouraging returns or upselling.

Still, the best opportunity to identify "angels" and "demons" occurs before they become customers. By properly sizing up prospects, your business can expend less energy and make more money without having to "fire" anyone.

THE RIGHT WAY TO LET THEM GO

Below, we've identified four categories of bad customers that can suck the life and profits out of your small business. For each one, we've also suggested a corresponding strategy for ridding yourself of these "demons" that's more nuanced than just telling them "You're Fired!"

1. Exceptions to the Rule. These are customers whose needs don't line up with your small business's areas of expertise. Often, they're either pushing you to provide new services before you're ready or they're still clinging to an old product line and haven't recognized that your business's focus has changed.

How to "Fire" them: Schedule a face-to-face meeting and patiently, but firmly, explain the gaps between their needs and your company's capabilities. If they are uninterested or incapable of switching over to your current products or services, refer them to a reputable business that can satisfy their needs and extend your current business arrangement for a few more weeks to allow them a smooth transition.

2. More for Less-ers. This customer focuses solely on price and is constantly pressing you for more while at the same time expecting to pay less. The only value they see in your company is measured in how good a deal you're giving them.

How to "Fire" them: Rather than just hit these customers with an up-charge that they're sure to bitterly reject, give them a choice between accepting a price increase or adding on other premium services offered by your business. If they accept the latter, you might still be able to convert them into a loyal, profitable customer. Even if neither offer appeals to them, chances are they will leave on good terms, feeling like it was their decision to go, rather than yours.

3. Whiners and Beefers: Some customers live to complain and feel like the "customer is always right" mantra is an excuse to act rudely and make ridiculous demands. Even if they seem like profitable clients, there are often hidden costs-like increased customer service calls and lowered morale-that make them worthy of getting the boot.

How to "Fire" them: Explain to the customer that, based on the frequency of their complaints, it's apparent that your small business will never be able to satisfy them. So, as part of your commitment to providing them the level of service they desire, politely let them know that you're referring them to another company. (Let your competitor deal with the headaches.)

4. Indecisive Wafflers: These customers promise big payoffs or lots of sales, but rarely follow through. And when they do commit to a purchase or a project, they often ignore your advice and end up disappointed or ask for endless changes and abandon the project before it's finished. If you're not careful, their dithering can ruin a hard-earned reputation for having satisfied customers.

How to "Fire" them: In the retail world, notifying your customers upfront about your returns policy and then strictly enforcing it can often weed out perennial browsers and serial complainers. In a professional practice or b-to-b environment, requiring both potential and current clients to commit to written, contractual deadlines as well as ongoing payments can help prevent them from becoming afflicted with constant "what if" syndrome.

Reed Richardson is a writer/associate editor for Business 24/7 magazine.