Firing A Customer – When Should You Do It?

Talking about firing a customer sounds blasphemous in the present climate of economic slowdown. Nevertheless talk about it we must , if only to get acquainted with the idea well before we actually have to do it. The idea of having to fire an employee, while unpleasant, has definitely crossed the minds of most entrepreneurs. Even the notion of letting go of a founder, for various reasons, is within the realm of possibility once the reality of an impending business divorce stares us in the face. But firing a customer seems suicidal or at the very least worth a close examination of someone’s head. Even in the best of economic times, it is hard to part with customers who contribute a significant amount of revenue. So, can there be a good reason to do so in hard times?

Five years after we began our software product business we had our first break-even year. The following year we made a real but nominal profit which, after one day of feeling good, made us face the fact that we would have to work even harder to grow or stay profitable. This, I will admit, was disheartening.

A close examination of where we were revealed that we had grown excessively dependent on one customer. This customer was taking us in a completely different direction from what we set had out. While the customer’s contribution had grown year-on-year (and was paying the bills), it would soon become non-scaleable, leaving us with little to spare for developing new products or alternate sources of revenue.

After much soul searching, Microsoft Excel crunching and internal debate, we decided to let go of this customer — not scale back — but truly let go. It was not easy; the customer was Japanese, we had spent five years cultivating the relationship, their CEO had practically adopted our CTO and their projects were technologically challenging and highly profitable. Over 18 months they went from nearly 60 per cent of our business to zero. And hard as it was, it turned out to be the right decision. In this instance, the relationship and our company survived the break and we were able to focus and execute in a scaleable manner elsewhere, which resulted in our subsequent acquisition.

So how do you know when to let go of a customer? What is the right way to go about it? How do you handle the fallout of such an action with your own employees and other stakeholders?

The deadbeat

If letting go of a customer could be easy at all, it would likely be letting go of the category of customers who are deadbeat — customers that don’t pay or those that pay many months later, act as though they are bestowing a favour on you and, in the interim, run up a bigger bill yet.

Most start-ups find firing deadbeat customers difficult for two reasons. First, an entrepreneur’s innate and at times unreal optimism that militates against terming a receivable as bad debt and the customer as delinquent. It is hard to separate the deadbeat from the merely late, particularly in India where we have a business culture of paying our suppliers late, if not last. Things get worse when a particular customer contributes significant revenue (at least on the P&L) but is a drain on your cash flow. Adding insult to injury, most such customers tend to be far bigger than the start-up and have greater resources available to them.

As an entrepreneur, hard as it might be, the moment you admit that you — a cash-strapped start-up — are financing the cash flow of a much larger company, is the moment you decide to let go of that customer. Having made the decision, you should pick the when and how with care. As with an employee or a founder, the assiduous application of common sense is critical to the termination of a relationship with a customer. Also, not every customer who pays late, occasionally or otherwise, may need to be terminated. Payment terms in your industry, your own reserves and cash flow planning should be factored into your decision. However, do not shy away from a quarterly review of your customers’ and your own receivables history to see if any of them are deadbeat; you may even be making some of them deadbeat by accepting such behaviour on their part.

The divergent

This group of customers is the hardest to let go of. They are a good source of revenue and profit for you, they pay on reasonable terms and promise continued growth. However, where they are headed and want you to go is very different from where you want to go. The good news is that if planned and executed well, such disengagement could be the win-win situation that business books talk about. This calls for honest self-assessment of where you want to go and regardless of how good the money or the relationship, if this customer will not take you there, then, the ability to disengage.

Such disengagement is best done by meeting the customer, explaining your assessment of the situation and your concerns. The customer may surprise you or at the very least agree and appreciate your quandary and be prepared to work with you for a transition. The longer you put off such a discussion and decision, the more difficult and messy it will get.

The difficult

With deadbeat or divergent customers you can at least put your finger on a cause. While this may not make it any easier to fire or disengage from them, the rationale for action will be clear. You can state and defend your reasons, even if they are unacceptable to the customers and sometimes to your own team members. There will, however, be times when you encounter customers who are neither deadbeat nor divergent and yet cause you no end of grief by being difficult. Such difficulty could range from the interpersonal — they don’t treat your staff or even their own staff well, to ethical issues — they expect you to do things that you feel are not correct. Again, these could be as simple as pre- or post-dating invoices or shipping documents going all the way to kickbacks. Others may merely be inconsiderate, wasting your staff’s time, nitpicking on every occasion or bad mouthing you.

In other words, customers can act just as any individuals could, in an insensitive, rude or inappropriate manner. As with friends or acquaintances, you are likely to overlook the first or the rare transgression.

However, many start-ups and entrepreneurs who would never put up with protracted abuse in their personal lives, tend to be tolerant or even masochistic with difficult customers. The toll this takes in the long-term is the primary reason you should fire such difficult customers. All too often, the brunt of such abuse will be felt by the front-line staff.

Unlike deadbeat and divergent customers whose impact is largely felt on your business first, the difficult ones will undermine the entrepreneur’s or the management’s credibility which is far more damaging. The need to act decisively with such difficult customers cannot be overstated.

Twice a year, review your customer list and their behavioural scorecard with your team.

Those customers who repeatedly behave in a difficult, divergent or deadbeat manner should be flagged and dealt with appropriately. This will allow your organisation to thrive like a garden that’s well weeded!

This article appeared originally in my Start Up Logic column in the Hindu Businessline