Ditch that customer!

Finally! Someone sees things the way I have for quite a while. Since my first year as a PM, I’ve told people the old axiom, “The customer is always right,”…isn’t always true. Insurance firms have known this for years.

Now the Harvard Business Review, April 2008 edition, “The Right Way to Manage Unprofitable Customers”, has researched the issue and verified my perspective. Ahhh, vindication!

People, regardless of characteristic e.g., height, IQ, poor dance skills (me!), fall along a continuum. On one end are those folks who have a great deal of said characteristic. At the other are people completely lacking it. With this in mind, customers who, near as I can tell are also people, reside on a continuum ranging from low maintenance, high profit on one end to high maintenance, no profit at the other.

Smart businesses and PMs realize this fact and find ways to determine the point on the continuum at which a customer is break-even. In other words, the cost of the customer’s care and feeding is just high enough to perfectly offset any profits they may otherwise provide. Anything below that point and the customer costs the business money. Unless you’re the government or a philanthropist, this is not the best strategy for long-term success. So what should you do?

As a young PM, my initial reaction was to say, “Ditch ‘em! If they’re costing my product money, I don’t need ‘em”. Not the most prudent counsel a body can give. Thank goodness for age, guile, and a few reading skills! The HBR piece provides sage advice – at least it’s more responsible than my youthful PM reaction.

The authors provide a strategy for reviewing the customer’s status and determining how best to address it. Within the framework of a simple, 5-step process, the business should assess the relationship, provide customer education if needed, renegotiate the value proposition of the business arrangement if warranted, and migrate customers to other vendors if possible. Then, failing all else, carefully terminate the relationship.

Of course, terminating a relationship may have pitfalls. Customers who are not let go may fear they’re next and seek other vendors to be safe. If enough customers are divested, the firm may need to downsize, losing valuable institutional knowledge as people resources are let go. Worse, divested customers may spread the word about being slighted. While the first two issues might be valid, the last may be less so. Another old adage states, “Birds of a feather flock together.”

So, if you feel as a PM that an unruly or costly customer is worthy of divestment, don’t fret much about negative word of mouth. If one unprofitable customer who is invited to leave tells his friends, it’s likely his friends are costly to your business as well. Not getting entangled with them because they’ve been warned off by their gold digging and newly divested comrades may be one of the best moves your business can make!