Contrary to popular belief, it is sometimes to a businesses’ advantage to lose customers. That’s not something we’d say should happen on a continuous basis. If the business owner deliberately orchestrates the loss, though, such an action could greatly benefit the business in the long term.
How can you do this in the best way? By grading your customers in much the same way as your coursework was graded back when you were in school (you remember that, right?)
By grading the kinds of customers you prefer your business to have, you will make it possible to eliminate those PITA (pain in the… well, you know) clients who create unnecessary headaches and detract from better serving other, more valuable customers. When you get rid of the PITAs, you also give yourself the opportunity to focus on attracting much more desirable customers who would represent the bulk of the business and contribute most to the profits.
Losing those who are a liability – for example, the five or ten percent who are the worst customers – is actually an asset that can help increase the number of customers in the profitable database.
I’ve personally done this with businesses I’ve owned or worked for in the past. Believe me when I say it’s liberating to be rid of those who are a drain on your time, resources and mental energy. You have to remember, though, to go out and replace those now-fired clients with the type of customers you really want to serve.
No Grading Curves or Bell Curves Here
When you grade your customers, you’ll likely end up following the old “80-20” rule. It states that 80% of a company’s business comes from 20% of its customers. Treat that 20% particularly well and invest extra energy in satisfying their needs while extending service above and beyond the call of duty.
This 20% forms the core of the customer base, and by cultivating them it is possible to create more customers who are similarly extraordinary, loyal, and lucrative. Birds of a feather flock together and the needs of the best customers will always be the same as the needs of the best potential customers the organization is trying to attract.
So, how do you get to that 20%? Let the grading begin!
An example of an A-grade customer is someone who pays their bills on time, is pleasant to deal with, is happy to pay your marked prices, sends their friends to do business with you and spends a reasonable amount of money with you each year. This is the cream-of-the-crop customer that you really want to keep at any cost.
Your B-grade customers aren’t quite the perfect or model customers, but are still worth having. They might be a little more price conscious, yet still pay on time every time. They’ll probably swing some business your way. The best aspect about B-grade customer, though, is that the can be made into an A-grade client.
Your C grade customers would probably be the type who would return goods for a refund just because they changed their mind, would haggle for as big a discount and they could get every time, would not listen to your advice, and could have past due invoices. I’d suggest firing these customers, unless you have a really high C+ individual or company that you may be able to push up into the B-grade category. And even then, it may not be worth your time to do so.
The Ds are the group you never wished you had. They are creating a scene in your place of business. They treat you and your team like dirt, always complaining about your price and never are satisfied with the products or service. These customers are always late payers and cost you time and money in collection and finance charges. I’d guess that you had a bad, gnawing feeling in your gut with many of your D-graders when you initially take them on.
D-grade customers are ones that should be fired immediately. And if you come up on potential clients who give you that bad, gnawing feeling, pass them by without looking back. (Or refer them to your primary competition!)
I advise you to do business with customers who treat you as you wish to be treated and respected. Don’t put up with customers who don’t pay their bills, don’t treat you well, and constantly hassle you on price. In addition customers will generally refer similar types of people to you, that is the last thing that you want to happen.
How often should you grade your customers? I’d say at least twice a year. If you’re feeling like you’re upside down on the 80-20 rule—80% of your customers are Cs or Ds and not As or Bs—then get to cutting. Post haste.
After you’re done with your grading, learn to (and do everything you can to) cater to the needs of your best clients. Even though you may take a hit in the short term, your customer base and net profits will automatically grow in the long term. What’s more, you’ll notice that your business (and even you!) will be more healthy, and working on your company will be more rewarding to you.