Sunday, February 20, 2005

Sometimes Firing Customers Is Necessary

There are two main theories in business when it comes to dumping customers:

1. Never, ever get rid of customers. You never know who or what that customer might end up to be, and getting new customers is harder and more expensive than retaining existing customers.

2. Always dump customers who are non-profitable, take up inordinate amounts of resources, or who make it hard to service other customers.
I am firmly in the second camp and believe dumping customers is sometimes necessary. However, it must be done carefully.

Early in my career at TI, Apple refused to do business with us. It turns out when Apple wasn't far beyond the garage shop stage TI dumped them, and from that time Apple refused to business with TI. It wasn't until Jobs was unceremoniously dumped for that soda pop salesman that TI got back in there, and remains to this day (even when Jobs took back the reigns). But TI still dumps small customers to this day.

But I don't think it's the fact that customers are dumped that creates animosity, it is how they're dumped. In most instances, I think showing the customer why they are being dumped can leave the door open for future business when conditions change.

I am going through the situation right now of having to dump one customer so I can service others. This customer is one of the top ten revenue producers for my corporation, but is a nobody in my product category. My group didn't want to service them originally because of their lack of revenue in this market, but we were forced to support them due to their relationship at the corporate level. However, we are now in a situation where even senior management agrees they need to be dumped.

Here is my factory's open capacity from 2004 to 2005. I have taken out the scaling in the Y axis, but let's just say that my open capacity is swinging from the positive six digits to the negative seven digits:

We are working to expand capacity, as seen by the small blip upward in March, but it won't be enough (I should note that this demand was unforecasted by my customer base and has come in the last 60 days). The situation means that customers are going to have to be cut - we just can't expand the factory in time to support everyone. And the customers who are being cut are those who are not in a market leadership position in this product category.

I plan to walk this customer through the issues and show them we simply don't have the capacity to support them this year. I am also providing contacts at my competitors who may be able to support them (although I think my entire industry is facing the same situation, so I don't think it will help).

Will the customer be upset? I have already given them verbal notice of what is going on, and they have not reacted badly yet. I am giving them the capacity numbers and other data this week to outline the business case, so we'll see where it goes. My guess is they will try to outrank me with senior management, but I already have that channel covered - the customers who are creating the crunch are deemed more important than this customer in this product category, so everyone is on board with the decision.

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