Firing Customers is Okay

Firing Customers is Okay

Running a business comes with a plethora of challenges and decisions. One of the most daunting yet crucial decisions a business owner can face is deciding to let go of certain customers. This concept might seem counterintuitive, especially in a world where "the customer is always right." However, firing customers can sometimes be essential for the health and growth of your business.

At Cody Party Rentals, we’ve experienced this firsthand. We've been in business for 25 years, but one of the most pivotal moments came early on, about five years into our journey. We were generating over two million dollars in revenue annually and felt confident in our growth trajectory. However, when we received our financial statements at the end of that year, we were shocked to learn that we had lost over three hundred thousand dollars.

Identifying the Problem

In our quest to understand this alarming financial discrepancy, we dove into the data and quickly identified the problem. Our two largest customers, who had been with us from the start and played a significant role in our initial growth, were costing us dearly. Each of these customers was receiving a 30% discount along with free delivery and pickup. Additionally, they were quite demanding, as they had every right to be, given the volume of business they brought us. These two customers represented about six hundred thousand dollars of our revenue. However, the cost of servicing them was the primary reason we were losing money.

Making the Tough Decision

Faced with this reality, I had to make a very scary decision. I scheduled meetings with these customers to inform them that, by the end of the month, we could no longer continue servicing them under the current terms. This decision felt like a huge risk, as they had been loyal customers and early supporters. However, continuing down the path we were on would have ultimately put us out of business.

The Outcome

Letting go of these customers was one of the hardest decisions we made, but it was absolutely the best one for our business at the time. It allowed us to restructure our pricing and service model, ultimately leading to greater financial stability and growth.

The Importance of Evaluating Customer Fit

As a new business, especially in the first three years, it's common to take on any customer that comes your way. Every sale feels like a victory, and building a customer base is crucial. However, as your business matures, it's essential to evaluate which customers are the right fit for your business.

Statistics and Insights:

- Profitability Analysis: A study by Harvard Business Review found that, on average, 20% of customers account for 80% of a company's profits, while another 20% of customers can cause 80% of the losses.

- Customer Fit: According to Bain & Company, businesses that focus on acquiring and retaining high-value customers see a 23% increase in profitability compared to those that don’t prioritize customer fit.

Examples of Firing Customers

1. Tech Support Firms: Often, tech support companies encounter customers who require excessive support, far beyond the standard service agreement. These high-demand customers can drain resources and time, leading to a need to reevaluate their fit.

2. Retail and Subscription Services: Subscription services sometimes face customers who frequently abuse return policies or demand significant discounts. Letting go of such customers can help maintain a healthy profit margin.

In business, not every customer is a good customer. While it's important to grow your customer base, it's equally important to ensure that the customers you keep are contributing positively to your business’s bottom line. Don’t be afraid to make tough decisions when it comes to customer relationships. Sometimes, firing a customer is the best step towards achieving long-term success and sustainability.

Remember, it’s all about perspective. Just as Ariel demonstrated in the “perspective blog” he and his friends saw an opportunity in what others saw as danger, viewing the act of firing customers as a strategic business decision rather than a loss can lead to greater opportunities and growth.