In uncertain economic times, preserving a company's customer base is a crucial aspect of maintaining business activity, particularly because it is generally much more expensive to acquire new customers than to hold onto current ones.

Ideally, every business-client relationship will be beneficial to both parties, but in some cases, the challenges of meeting a customer's needs may outweigh the benefits of the business they generate. Evaluating the merits of an individual account can help organizations decide whether it is better to retain a client or let the client go. But before making the decision to "fire" a customer, an organization needs to examine a broad range of considerations.

Under certain circumstances, having a challenging customer can negatively affect other segments of the business. "If a difficult customer is impacting your ability to service your other customers, it could drive your good clients away," according to Entrepreneur.com. "If a complaining customer starts speaking negatively to others, that puts your reputation on the line."

Keeping a customer satisfied normally prevents complaints from arising, but the financial burden of meeting all of a client's needs may interfere with the ability to service the overall customer base. In this situation, it is helpful to determine the dollar amount that needs to be earned per client in order to clear a satisfactory profit. Customers that fall short of meeting that margin, or those that actually cause the company to lose money through a transaction, may need to be cut loose, particularly if devoting the assets leads to lower-quality service for other clients.

"If you can't work out an arrangement conducive to both parties, it may be time to part ways," Entrepreneur.com explains. "The immediate impact of losing a customer might be a financial drain, but the increase in your productivity and that of your staff could make up the difference. Also, the costs associated with handling the customer go away."

The challenge of spotting a burdensome customer can vary depending on the size of the organization and the number of clients it works with, but there are a few telltale signs that can be useful in the process.

In an interview with Forbes.com, Dennis E. Gonier, CEO of customer service research firm TARP Worldwide, offered the following tips for identifying a low-value customer:

• Inexpensive Sign-up — If a customer is acquired through the least expensive method, that means they may have sought you out on their own, which, according to Gonier, "is often too good to be true." Likewise, customers attracted through a major promotional incentive suggests they may be too sensitive to prices or rewards, making them less likely to display long-term loyalty.
• High Service Costs — A customer who requires significantly more money, time or labor to keep satisfied than others who bring in the same amount of business may be a drain on the firm's assets. Spending an inordinate amount of time with customer service or contacting the company more often than usual are some signs of this attribute.
• Switching Behavior — A client who displays or has displayed a tendency to frequently switch between companies in your product or service sector is less likely to maintain a long-term relationship with any single business.
• Litigation — A disgruntled customer may file a formal complaint against a company or even initiate a lawsuit. Obviously, keeping such customers is probably not a cost-effective idea (or even a possible one).

Making the actual decision to end a relationship with a customer depends on a company's priorities. Online e-business journal Pandecta Magazine recommends determining a customer's value by examining the client's average order size, frequency of orders, the margins on each transaction, their price sensitivity, the amount of repeat business, return rates and the timeliness of their payments.

However, even after deciding that a customer is of low value to your company, the best decision may not always be to cut your ties. A 2007 research paper from the Wharton School argues that "firing" problematic customers may actually decrease company profits, because it makes valued clients more likely to be poached by the competition.

"What our analysis tells us is companies make money, in part, by confusing their competitors about their customers. If you make your customer base transparent by firing your low-value customers, competitors will hit you hard because you will be left with customers of one type," Jagmohan Raju, coauthor of the study, told Knowledge@Wharton.

The study claims that the key is to avoid revealing which customers are deemed valuable and which are not. This can be accomplished by trying to improve the quality and loyalty of high-end customers while reducing the expense of satisfying low-end customers.

"[Y]ou should find other, cheaper ways to manage the low-value customers, such as encouraging them to use automated phone-response systems or the Internet or offering minimal discounts or other benefits," Raju explained. "You have to keep your competition confused about who your good and bad customers are."

Whether a company decides to "fire" its low-value customers, attempts to convert them into higher value clients or tries to implement a less-costly method of holding onto them, the end result should be a deeper understanding of what drives a company's profits and how to maximize the approach that works best for the business and the customer or client.

Earlier: How to Give (and Know You're Giving) Good Customer Service

Resources

Is Every Customer a Good Customer?
by Lesley Spencer Pyle
Entrepreneur.com, Sept. 16, 2009

Dealing with Bad Customers
by Tom Taulli
Forbes.com, Feb. 22, 2006

Fire Your 'Bad' Customers and Send Them to a Competitor!
by Noel Peebles
Pandecta Magazine, 2007

Customer Value-Based Management: Competitive Implications
by Upender Subramanian, Jagmohan S. Raju and Z. John Zhang
The Wharton School, September 2007

Why Firing Your Worst Customers Isn't Such a Great Idea
Knowledge@Wharton, Dec. 12, 2007