Get Rid of Bad Customers

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Are you ready to get rid of bad customers?

You should be.

Bad customers are costing you more than you realize. You already know that some customers are less profitable and more difficult to serve than others. Accepting lower margins on some accounts and making higher margins on others seems reasonable, especially if your sales are slow. And, if your business has limitless resources and you have unlimited patience, then you can afford this overall profitable mix of good and bad customers.

But, it’s likely that your resources aren’t boundless. Your business may have a specified (or limited) credit line, inventory availability, and production capacity; and you have just 24 hours in each day. Holding onto a bad customer, then, prevents you from serving the good ones.

Here are some types of bad customers and techniques to get rid of them (without alienating your good customers).

Slow-paying customers

These customers consistently pay late and only after a series of follow-up calls. They may apologize for tardiness or they may insist that your shipping processes are faulty. They are unable to make and honor commitments, even if you are willing to negotiate revised credit terms. Finally, their payments often coincide with urgent needs: they pay an old invoice so that you will release a new shipment.

Make sure that your credit policies have been firmly established and clearly communicated. Then, move the bad customer to a cash-only status, requiring payment-in-full prior to shipping products or providing services. Don’t feel pressured to open credit lines after one on-time payment but offer to revisit credit terms after a full year of prompt payments.

Customers with constantly-changing and ever-expanding needs

These folks have full-service expectations with limited-service budgets, and are typically the bane of service firms. These customers convey their needs as simple because they haven’t analyzed and articulated their requirements. When results anticipated don’t materialize, these customers redraft their requirements or demand additional services without compensating your company.

Often, these aren’t bad customers but ill-educated ones, who don’t know how to create project specifications and keep adding requirements in hopes that, somehow, their wishes will be fulfilled. Before taking on an assignment, advise prospects of your company’s capabilities, structure contracts that define project scopes and service levels, and specify scenarios that may involve additional fees. Your goal is to make sure that both your company and your customers commit appropriate resources prior to the start of a new project.

But watch out for customers eager to get started immediately, impatient with the needs-assessment process, or hoping to quickly capture a sure-to-skyrocket market or revitalize a failing business. And, beware those who don’t understand that they need to purchase a suite of services to achieve their goals.

Price-sensitive, demanding customers

You offered incentives to these customers to attract new business and hoped to nurture their accounts to targeted levels of profitability. Or, you accepted lower prices because you were convinced that these customers would require fewer resources or accept no-frills product lines. Instead, these customers resisted standard pricing and insisted on high service levels and numerous product features.

Decide what pricing and terms you’ll accept to maintain these relationships. Communicate these requirements and the reasons you’re enforcing standard pricing. Be firm. Or, if you’re confident that you’ve already made sufficient concessions to please a demanding customer, then it’s time to refuse additional business at any price.

Conniving customers

These customers seem to have legitimate complaints but they misrepresent problems to extract restitution in the form of full refunds or heavy discounts. They can be a nuisance to e-commerce businesses in particular: they request reversal of card charges by protesting that packages paid for were never delivered, or demand free product and shipping because they insist that items received don’t match website descriptions.

According to a customer service manager I interviewed, genuine service failures should be diagnosed and addressed immediately, customers reimbursed, and sources of internal errors corrected. So, you don’t have to enact strict rules that cripple efforts by customer-service representatives to make amends for your mistakes.

Instead, 1) identify customers with frequent problems by documenting complaints in the call notes of your CRM (customer relationship management) software; 2) create customer-specific policies, such as requiring a signature for deliveries, that address past problems; and 3) direct your staff to check notes and take appropriate actions prior to processing an order or resolving a claim.

You’d love to transform bad customers into good ones, and I’d like to show you how. But if you’ve been in business for a few years, you’ve learned that your job is difficult enough, without the responsibility of educating, persuading, and monitoring troublesome customers. Start making hard decisions, push away those who drag you down, and cultivate the right relationships.