When—and How—Should You "Fire" a Customer?

When I was a hot-headed 20-something, I returned a rental car to one of the national agencies. Dissatisfied about something, I stormed into the airport rental office, furiously paced in front of the desk, and loudly lambasted the agent. The next time I tried to rent a car from the company, no one would let me. It was several months before I found out I had been blacklisted, and for at least a year I could not rent from that company. I had been fired.

Customers can be fired for different reasons. Employees may feel threatened or abused by the customer, as in my case above. Or the customer may simply be unprofitable. Whatever the immediate reason, firing a customer indicates that someone in authority in the company perceives the customer to have zero or negative value to the company. Put another way, the tangible and intangible costs of serving the customer outweigh the cash and any goodwill received from the customer.

Customer satisfaction hugely affects the calculation of the customer's value. Satisfaction is a primary driver of customer behavior. In large part, it determines how the customer acts toward your employees and what he or she tells friends and colleagues about your products or services. Satisfied clients positively influence employee satisfaction and are more likely to spread favorable word of mouth about you. Because of these intangibles, a satisfied customer is worth much more than the nominal profit of that customer—and far more than a dissatisfied one—even if revenue from the two customers is identical. Consequently, companies should be particularly sensitive to any thought of firing satisfied customers.

Perspective
Different groups within the company see the benefits and costs of customers—and, consequently, their value—differently. Executives are most likely to see the tangible benefits: the revenue and profit streams. They will also be very aware of the cost of attracting a new customer to replace a lost customer, typically pegged at five times the cost of retaining a customer. Finally, they are more likely to take a long-term view and be confident that a dissatisfied customer can be turned around.

In contrast, service and support may see a very different kind of stream: complaints, criticisms, demands, and, in some cases, abuse. Their jobs require maintaining an immediate rather than long-term view. So executive management on the one hand and service and support staff on the other often have different views on firing a customer. The fact that firing a customer is relatively rare reflects, in part, executive management's greater say in the matter. Left up to support, it would be a much more common occurrence.

Just as there are gentler ways of terminating an employee, so is there a range of ways to end an unprofitable customer relationship. The best way is to make the unprofitable customer profitable, either by reducing costs or raising prices. If prices and services are tailored to the customer, as in most B2B situations, the company can raise prices, seek ways to deliver the same services more cost-effectively or scale back services when the contract is renewed or a product re-purchased. If customers balk at the changes, they can decline to renew the product or service—in effect, fire themselves. This remedy is a two-edged sword—if many of your customers fire themselves, you go out of business.

Another option is pre-firing: Don't do business with undesirable customers in the first place. Credit card companies calculate consumers' credit risk before offering them credit cards.

Particularly challenging to manage are customers on fixed pricing for unlimited service, such as network bandwidth, technical support, or all-you-can-eat buffet. Customers on such pricing schemes whose demands far exceed norms are likely to be unprofitable.

Subtlety
Instead of firing such customers, for instance, NetFlix has taken a gentler approach. An online DVD rental service, NetFlix offers an unlimited number of DVDs for rental via postal mail for a fixed monthly fee. Customers who quickly send back movies to get more erode the company's profit margin because each DVD sent out and returned costs the company nearly a dollar in postage alone.

Rather than raise prices for these users and lose the marketing benefits and administrative savings of its fixed pricing, NetFlix "throttles" them: It slows down order fulfillment for customers who demand the greatest number of DVDs per month. NetFlix does not attempt (or no longer attempts) to hide the practice. According to NetFlix customer service, "In determining priority for shipping and inventory allocation, we give priority to those members who receive the fewest DVDs through our service."

There has been some negative fall-out to the practice, in the form of blogs (see http://www.hackingnetflix.com/2005/02/netflix_custome.html). But my guess is that throttling has benefited NetFlix over all. With 2.5 million subscribers, the considerable financial and operational benefits of throttling high-usage customers probably have more than outweighed the relatively modest unfavorable PR.

Most challenging of all is the customer whose behavior is unreasonably offensive or threatening. Such a case should be escalated to a supervisor who contacts the customer to discuss the problem or concern. Formally and pro-actively discontinuing service to a customer, the ultimate stage in an escalation process, should be used cautiously and sparingly. A company could be found liable for improperly discriminating against a customer. At the same time, customers put themselves at risk of losing access to what may be a valued supplier.

In general (and where national security is not at stake, such as on an airplane), I see the balance of power shifting toward the consumer. With the freedom with which customers can blog about their experiences, any remedy that appears heavy-handed can provoke further unfavorable customer behavior and PR. Customer relationship managers must, therefore, listen carefully before acting.

Customers are only human; they may merely want someone to hear them out and listen to them. Increasingly, you can only successfully fire a customer today if the reasons for doing so seem reasonable to reasonable people. To paraphrase Benjamin Franklin, a spoonful of honey will discourage more unfavorable word-of-mouth than a gallon of vinegar.

John Chisholm is chairman and CEO of CustomerSat, Inc., the leading provider of enterprise systems for gathering, analyzing and driving action on customer feedback. He holds bachelor's and master's degrees from MIT and an MBA from Harvard Business School. He is based in Mountain View, California.