Firing the Right Customers Is Good Business

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We like customers and have spent most of our careers studying them. In our research, teaching, and consulting projects, we have repeatedly urged executives to listen to their customers.?However, we have come to realize an uncomfortable truth: Some customers are just not good for you and will ruin your business. Hence, you would be better off “firing” them.

Firing any customer goes against much of the prevailing wisdom in marketing and business. According to legendary business guru Peter Drucker, the purpose of any business is to create and keep a customer. This insightful statement has become a guiding principle across industries.

However, not all customers are good business. In our conversations with practitioners, they often point to examples of customers they would like to cull because serving them is an endeavor with little or no likelihood of ever becoming profitable. Other customers lack a strategic fit with an organization and pull it in the wrong direction. We have thus rephrased Drucker’s statement: The purpose of business is to create, keep,?and lose the right?customers.

Evidence-based termination of customers after thoughtful deliberation is finally happening in some industries. For instance, cities like Amsterdam and Barcelona have launched ad campaigns that explicitly ask certain problematic tourists to stay away. And Amazon has banned users who return too many items from making new purchases.

Sometimes, when it’s done thoughtfully and deliberately, it can be good business to lose customers. But how can you determine the right customers to fire?

Good and Bad Customers

All organizations have good and bad customers. Good customers are profitable and good for the business. They are a good match for the organization’s capabilities and purpose and are relatively easy to serve. Notable high-profile customers might have a halo effect on the business in certain situations, such as when the company becomes a supplier to well-known brands. In general, these customers add more to the business than they take. Relationships with good customers should be nurtured and maintained.

In contrast, bad customers are unprofitable and bad for the business. They are a poor match with the organization’s capabilities and strategic position and are troublesome to serve. They might have a horn effect on the business. Some companies explicitly refuse to do business with tobacco companies for that reason. In general, bad customers take more from the business than they add and should be actively removed from the customer portfolio.

This categorization is similar to a strategy implemented by Best Buy. The retailer recognized that it did not want to keep approximately 20% of its customers, so it classified all of them as “angels” or “devils.” According to?The Wall Street Journal , “The devils are its worst customers. They buy products, apply for rebates, return the purchases, then buy them back at returned-merchandise discounts.”

Some customers are good or bad in absolute terms — that is, all market actors either want them or want them to disappear. Others are good or bad relative to a specific business. Distinguishing between good and bad customers in both absolute and relative terms is crucial, given that the two groups have very different implications for the organization.

How Do You Know Who’s Who?

Before casting off customers, you need to understand the criteria for analyzing which relationships need to be terminated.2 ?Based on our research, we suggest focusing on needs, behavior, and customer value. Having the ability to effectively fulfill the customer’s needs is a necessary starting point, but you must also be capable of dealing with the customer’s behavior. If both are possible, you must then assess how valuable the customer is to you.

The following scenarios suggest that termination might be the right move:

1. The customer’s needs are outside your area of expertise.?While such cases might be viewed as opportunities for organizational development, they often result in diluted expansion and a fragmented strategy. As emphasized by Harvard economist Michael Porter, strategy requires trade-offs, so having a strategy entails being clear about what you will not do. Consider low-cost carriers, such as Ryanair, easyJet, and Southwest Airlines; while there are undoubtedly customers who want them to expand their offerings, doing so would essentially erode their strategies, which are built on core capabilities and activity systems that enable efficient, low-cost operations. Hence, they simply cannot accommodate this customer need. Customers with needs that are beyond the capabilities and focus of your business should be terminated.

2. The customer’s behavior is too troublesome for you to handle.?Some customers are just too much — either they cannot stop interacting with the company, or they engage in unpleasant, unethical, or even illegal behavior. Consider customer service call centers. In these settings, customer interactions are often quantified based on measures such as the average duration of a call that resolves a customer inquiry, the portion of customer queries that are resolved at the first point of contact, and how many customers call back repeatedly. Based on such data, businesses can pinpoint customers whose interactions result in high costs due to extensive and frequent conversations — costs that might surpass the earnings generated from sales to these customers. Certain B2B customers continually want meetings, or they expect 24-7 availability or enhanced service to meet?their?deadlines. In these situations, the customer’s behavior might simply be too asynchronous with yours, and, as a result, it might be too costly or resource-demanding to handle.

3. The value of the customer relationship is negative for you.?Part of successful relationship management is being able to assess the value of a given customer relationship. Standard measures for analyzing what each customer brings to the table include turnover, volume, profitability, and payment compliance — data readily available through a company’s accounting system. However, it’s imperative to also evaluate a customer’s impact on the business’s reputation (as a reference customer), innovation (as a cocreation partner), knowledge enrichment (as an insight provider), and motivation (as a purpose-driven patron). Despite being pertinent to all companies, these factors often remain unstructured or overlooked. Measuring customer contributions is paramount to identifying customers that don’t add value to your organization.

However, even if they?are?profitable, customers who engage in unethical or illegal behavior might be undesirable for your business. For example, the values and principles of criminal gangs or white-collar criminals looking to launder their money are not in line with those of most banks.

While any one of the above criteria would be sufficient to fire a customer, the urgency of the relationship’s termination will arguably be proportional to the number of criteria that apply to a given customer. Informal discussions in which you analyze specific customers or segments of the market in light of these three criteria will undoubtedly result in useful insights that can aid in making difficult strategic decisions, especially when you can supplement the discussions with data analyses.

How and When to Terminate a Customer Relationship

It’s one thing to identify the customers you need to fire and quite another thing to actually fire them. Termination methods can be direct or indirect. A direct approach involves explicitly stating the end of the relationship, which necessitates clear, honest, and transparent communication. This direct method requires the customer to understand the rationale behind the decision. Although some customers might react negatively, it’s crucial to maintain a professional stance, similar to that of a manager firing an employee.

Uber, for example, is known for deactivating driver and rider accounts that breach the company’s community guidelines. While often frustrating for users, Uber’s terminations are akin to employment contract terminations based on specified terms. Hence, they can easily provide an explanation of exactly why they want to terminate a relationship.

In a similar vein, banks are notorious for firing customers, which they refer to as “exiting” or “derisking.” Typically, these terminations are prompted by procedural violations or transactions that appear out of character or raise red flags regarding potential fraud, money laundering, or other crimes. (Banks are also notorious for their vague communication about terminations.)

In contrast, B2B settings often involve more personalized communication but maintain a direct tone. For instance, one consulting firm explicitly declined work from a tobacco company, citing a misalignment with its corporate values. Once again, the message conveyed was direct and unequivocal.

Indirect termination occurs without explicit acknowledgment. Similar to personal relationships, this approach might involve “ghosting” — which can be seen as unprofessional. This could entail turning down event invitations, canceling newsletter subscriptions, delaying shipments, or introducing price increases.

Or consider the recent troubles Red Lobster has experienced and how it handled them: In an attempt to boost restaurant traffic, it announced that its cheap all-you-can-eat shrimp offer would become a year-round menu item rather than a limited annual promotion. Red Lobster succeeded in attracting a certain customer base — only to find out that it couldn’t serve the all-you-can-eat segment at a profit. Consequently, it gradually raised the price on the offer, making it unattractive to some existing customers. The allure of this approach lies in avoiding direct confrontation, or even banking on the customer terminating the relationship themselves due to dissatisfaction.

The timing of termination must also be considered. Abrupt endings can swiftly mitigate negative impacts such as enhanced risk exposure, potential bad press, or even regulatory requirements. However, scheduled terminations offer customers time to adjust and can lead to a more appreciative response. Salesforce, for example, has employed a hybrid approach that combines abrupt and scheduled terminations: When it publicly announced a policy that immediately prohibited potential new customers that sold specific types of firearms from using its software, existing customers that were selling those products were allowed to continue until their contracts expired.

In most cases, a direct and scheduled approach tends to yield more positive outcomes, for both the customer and the business, but the ideal method will depend on specific contexts and customers. Preventing reentry is also essential: Terminating bad customers serves little purpose if they can easily return. Designating a gatekeeper or “bouncer” responsible for monitoring customer entry and blocking undesirable ones can be effective.

Termination as an Ongoing Effort

Developing a day-to-day operational capability to terminate (and block) detrimental relationships is crucial. The process involves consistently identifying problematic customers and conducting streamlined terminations through a thoughtful, evidence-based process. However, the process doesn’t culminate with the termination itself. After being let go, some customers might tell others what happened, and word could reach media outlets. For instance, after it was reported that Danish facilities management company ISS would stop operating in its least profitable international markets, it naturally sparked some uncertainty among other customers regarding whether it would stop serving their markets as well. Such scenarios are why it’s vital to optimize relationships with good customers, reaffirm commitment to their satisfaction, and continuously earn their trust. Firing detrimental customers enables better service to loyal ones. As when managing remaining employees after a round of layoffs, special attention must be paid to the customers that are retained.

While most companies celebrate new contracts and soaring sales volumes, it’s equally crucial to applaud courageous terminations. Often, eliminating unprofitable customers can significantly improve the bottom line, surpassing the gains from acquiring new clients. While we wholeheartedly advocate customer acquisition to fuel top-line growth, an equal emphasis must be placed on pulling the plug on detrimental customer relationships. Making termination a natural part of your company’s operations is, in other words, essential. Paradoxically, while sales professionals often receive acknowledgment for securing new deals with bonuses or celebratory rituals, very few companies actively incentivize timely and suitable customer terminations. Success in this realm hinges on proper recognition.

After careful analysis, you might realize that you have bad customers who need to be shown the door. The good news is that doing so is good business, and an evidence-based approach for terminating customers, along with structured and streamlined processes for actually letting them go, will serve you well. Being strategic in the management of your customer portfolio also entails periodically paring down for profitability.

Customer Centricity Summit, hosted by MIT Sloan Management Review Middle East, will take place on September 18th-19th, 2024. It will offer a lens into the future of branding, where enduring relationships with customers are cultivated through trust, authenticity, and value. Click here to register for the Customer Centricity Summit.