Firing Your Clients –Even During a Recession

Sometimes, in a recession, the best way to increase profitability is to fire your own customers.
I’ve been hearing from a few vendors and agencies, that they’re letting go of their least wanted clients. Why? During a recession, vendors are focused on being efficient with all resources, and in some cases, some clients are net negative in time, energy, resources, and morale.

Some clients are net negative
There’s a rule-of-thumb in the business realm that 20% of your customers will comprise of 80% of your total revenues. If that model is true, then likely the inverse holds truth: the bottom 20% of your clients account for 80% of all of your resource spend.

This is exactly what I heard from a recent agency I met with, they strategically decided to get rid of the bottom fifth of their client base. Why? The costs require to service some high touch clients that increase scope creep, are cheap in the invoice, shop around beyond reason, and even cause emotional abuse to account managers made it ‘net negative’. It makes sense, especially with the account manager abuse, right? What would you rather lose, a client or a dedicated employee, and risks of damage to morale?

So which clients are most likely to get canned by their vendors? Often times top name brands feel they can tout their reputation in hopes of getting business from vendors at the lowest cost –yet expecting the highest service. Having worked in the banking industry for a short time, I know that vendor management often has it’s own department that scours the market to ensure the company is getting the best deal.

Social media vendors at risk for unpaid education services
In the social media space, (which I cover) I’ve been hearing of some brands requiring extensive education from vendors. From full strategy days (non paid), non-stop Q&A in email and IM, and phone calls. While in such a nascent industry this is important, and key for a vendor to demonstrate ability, at some point, it crosses the ‘greasing the skids’ to being a complete ‘time sink’ –especially if the vendor isn’t charging for it’s hard earned knowledge in formal education offerings.

Vendors should analyze their customer base
Vendors, now more than ever, are starting to evaluate how to cut costs, and perhaps the first place to look is finding the resource sink that’s taking up the organizations time, resources –and willpower and focus on the higher value clients. A few considerations:

  • Evaluate the clients that you have that are net negative –is the long term gain worth it?
  • Could you better allocate your resources to increasing growth in premium value clients
  • How could your staff be better spending their time?
  • Often, companies purge their employee base to ensure quality talent, can you do the same for clients?

Buyers should partner with vendors
Brands, who don’t want to be stuck in the costly multi-month RFP, vendor evaluation, negotiation, and paperwork process should take in the following considerations:

  • Are you exceeding the scope of the original requirements of the agreement?
  • Is your team calling in special favors on a consistent basis?
  • Do you consider your vendor a long term partner and have made that clear?
  • Is your team getting proper education from folks who specialize on new topics? Or are you unrealistically expecting them to hand hold you beyond profitability?
  • Having an unhappy vendor will ultimately impact your quality of service –and folks in any industry talk amongst themselves.

Business relationships are two-way
In the end, we should all remember that these business transactions go both ways, and the relationships will sever when both sides aren’t met.  In my predictions of the future of the social web, it’s possible that buyers (and vendors) could rate their relationships with brands –and even individual stakeholders, if that comes about, it could cause a shift in power from buyer to seller.

Would love to hear stories from you all about when vendors have fired their own clients, I ask however, please keep specific brands names out of the comments.

  • S. Cruz

    The above is a good reminder that not all clients are good ones (even if they pay their bills). Focusing tightly on differentiation, on targeting those who can build your business is smarter in the intermediate and longer terms.

    I’ve fired clients – recently, even in this economy – and in both cases, it was ethics that made the decision for me. Regardless of the state of the economy, when clients do things that show their characters to be incompatible with your own core beliefs, your gut tells you what to do.

  • http://www.whitehorse.com Jamie Beckland

    White Horse just ended a long relationship with one of our clients, and it was the right decision for all of the reasons you outline, Jeremiah.

    Our principal talks about the contributing factors, and reasons why we ultimately decided to end the relationship here:

    http://adage.com/smallagency/post?article_id=136215

    The biggest reason was that our full range of strategic services weren’t going to be utilized, which meant that we would only find ourselves in a race to the bottom in terms of what projects we would be implementing.

    Among other benefits, it has been valuable for the staff to be able to act on the other accounts with great potential, because we aren’t devoting so much time to the account with a short future.

  • http://www.web-strategist.com/blog/ jeremiah_owyang

    Jamie

    Thanks for that link, interesting article, esp from an agency side.

  • http://www.kunocreative.com/blog John McTigue

    This is a painful but necessary decision even for a small agency like ours. Getting rid of decent cash-flow regular cash flow is tough, but you have to weigh the costs, i.e. the non-stop e-mails and phone calls, the daily unplanned deadlines, the disruption in planning and execution of other client projects. I don’t think all clients who fit this description need to be fired, but I do think some level of politely “taking them out to the woodshed” is appropriate. I’m sure most would be mortally offended by that, which may lead to them firing you. Not sure which is worse. You can’t lose by focusing on your best accounts from all perspectives.

  • http://virtualimpax.com Kathy | Virtual Impax

    Jeremiah,

    I recently fired a client because they expected white glove service for a “Walmart” price. Recession or not – the amount of time and energy that client was consuming was way out of proportion to the revenue they were providing.

    It’s easy to fire “bad” clients who don’t pay their bills. It’s harder to fire the “bad” clients who pay their bills but in the process want $1.50 in services for every $1.00 they spend – especially in a service based industry because the client in question IS contributing revenue.

    In this case, I knew they were a time suck – I just didn’t realize how BIG of a time suck they were until they were gone. What a relief!!!

  • http://www.mariareyesmcdavis.com Social Marketing Impact

    I agree with Kathy above, there needs to be a balance in time spent and money made – businesses can not continue to grow (even the little guys) without efficiency and profitable growth. It’s tough, especially during a recession mindset, but it’s necessary for the long-term health of your company.

    Great stuff Jeremiah!

    Maria Reyes-McDavis

  • http://www.creativetraction.com Duane Brown

    I’ve fired a couple clients over the years and for many of the reasons listed above. This is something more and more agencies need to consider as we reach Q3 of 2009.

  • http://www.jbcopeland.com/blog Josh Copeland

    One challenge I raise is related to your suggestion around finding the resource sinks that take up organization’s time, resources and willpower and then focus on higher-value clients. You stop short of suggesting the vendor retire those client relationships, but one inherent problem is what to do with the staff of clients retired…

    I think my agency should have retired one piece of business because of all of the problems you mentioned, but they didn’t for what I believe to be political reasons. Politics be what they may, the client ultimately put the biz under review and then found a new agency that was more cost-efficient precisely because of this economy. Combine that with another client that severely reduced their budget (both because of the economy and because of where they were in their business cycle) and I found myself under-utilized.

    It may be debatable, but right now I believe that under utilization is one of the criteria for agency layoffs. After all – if a staffer is only 50% billable, they may be more expendable despite their expertise because they are costing the agency more than the dollars they bring in. In my case, I believe (and some close to me speculated) that my under utilization led to my being laid-off.

    I believe that for the premise of retiring clients in a recession to work, agencies need to be willing to consider to use under-utilized staff to:
    - contribute to new business pitches
    - form small staffer teams to experiment with new technologies and report results to agency teams
    - participate in the analysis of other internal agency inefficiencies and productivity gaps (ie – number-crunching on project actuals vs. estimates
    - help agency communication teams to gather recent project case studies for successful programs throughout the organization

    Of course all those ideas hinge upon the agency being willing to hold onto staff despite them hurting their balance sheet. My challenge to you is talking to agencies and finding out how far agencies should be willing to go to support underutilized staff of retired clients… at what budgetary point does it make financial sense to invest in agency staff who have less billable work to do…

    Thanks for an interesting debate!

  • anne

    great post! as i write this, we are contemplating firing one of our top two clients. it’s a huge client. you see the logo every day. we fought hard to win it and keep it. we’re proud to have it. but the objectives and people in place at the client when we pitched and won the business are no longer in the equation.

    they’ve all been laid off or transferred. entire client-side departments have turned over within months.

    middle managers at large organizations — the people who got things done — are gone. halls at the clients are empty. desks and cubicles are vacant. what’s left are overworked top management, beancounters, attorneys, very junior (translation: inexpensive) 20-somethings, and dazed company veterans who have been shell-gamed in from other departments. they don’t trust vendors, they don’t trust each other. everyone’s a lone ranger, one paycheck away from insolvency.

    like most vendors, we really care about our clients (the individuals and the enterprises) and sincerely want to help them be successful. we are constantly in the teaching mode, and constantly wondering if the “complimentary” one-day seminars and cheerful 24/7 blackberry availability will ever pay off.

    as i watch our clients struggle, i truly believe that their lives are much worse than ours. yes, we could “out” the bad ones…but would it matter? our clients today will be laid off or transferred elsewhere by next month.

  • http://www.bullshitobserver.com todd

    This is great. If only my clients read this blog.

  • http://www.web-strategist.com/blog/ jeremiah_owyang

    Todd, it’s possible they are, many of my readers are from large brands. Hope this wakes some folks up.

    Josh, Anne and others thanks for this.

    I guess this goes to show that:

    The customer is always right

    But

    Vendors have the right to choose who is a customer.

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  • http://closingbigger.net Shane Gibson

    Agreed Jerermiah. I do sales training programs for many types of companies and many people and companies fail in the sales game because they are busy doing busy work for demanding clients that are unprofitable.

    I am advising my clients to target companies that are bucking the trend and investing in their business in the down economy. Sometimes it’s not investing money but mentorship, training, coaching and being a strong positive leader as a CEO or VP of Sales. Spending too much time with clients that have a toxic attitude during tough times can erode our morale and reduce the time we can spend building momentum with good clients.

    For the seller I think it’s a scarcity mentality that causes them to take this kind of business in the first place.

  • http://twitter.com/jaremy Jaremy

    Interesting to hear so much talk about firing your clients, considering I’ve been pitched twice in a week to subscribe to a newspaper at shockingly low rates (that I can’t imagine drive profit). Newspapers and magazines carry on a ton of net-negative clients. The way they’re going, that will only increase.

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  • http://blog.hirestrategies.co.uk Peter Gold

    Whilst I concur with some of the points is this another example of Jeremiah getting above his station yet again? As consumers we expect the likes of Wal Mart to stay cheap yet we forget how they achieve this in the first place. The US is in a financial mess and I do not think crowing about being able to sack clients sends out the right message.

    I often deal with US software vendors and see some of these US vendors struggle to do well in Europe. Yes, there are some that do well in Europe but this is often due to local sales team shielding the local client from the US attitude. Yes, pick your clients but to openly flaunt your ability to sack them when you choose is an interesting marketing strategy. I know not all on here are taking this approach but I have seen this happen in the UK and it’s not that great; best it happens quietly and professionally IMHO.

  • http://www.web-strategist.com/blog/ jeremiah_owyang

    Thank Peter

    You bring up some good points. I never thought of it this way, but didn’t the US financial system get into this mess from lending to bad customers? That’s my understanding, so maybe if they were choosy about getting quality customers (like what is suggested above) they would haven’t gotten into this lending issue.

    I agree with you, the US attitude doesn’t do well in other countries, I gotta remember that while I travel (in Europe right now)

  • Anji

    In a small agency clients often latch on to one of the principals, refusing to make decisions or move work forward through other team members who they perceive as being too junior. We have fired clients that fell into this category because the ensuing bottleneck has impeded the agency’s ability to grow and provide good service, as well as those that habitually treated our project managers badly. This type of treatment is terrible for morale particularly when you’re grooming people to take on more management responsibility.

    To make the process truly meaningful, we would often have the project manager do the firing – of course this was only when we knew that the project manager was doing a great job and that the client was habitually out of line. We’d work with them on their letting-you-go speech, and on the reasons that they would give, focusing on growing evidence that we as a company were no longer a good fit for the client and their needs. The project manager would then let the client know that one of the principals was available to discuss the matter, but that they would be the one wrapping up loose ends and providing copies of final materials.

    Our team members that experienced this process changed measurably – the fact that their employer believed in them enough to cull out bad business relationships was a huge motivator and led to even more buy-in by staff.

    It was amazing how virtually all of these clients (3 in total over the years) would then beg to stay – dreading the effort required to search for a new service provider.

  • http://blog.hirestrategies.co.uk Peter Gold

    Jeremiah

    Yes, bad customers do cause problems but how you let them go is the key point rather than the letting go.

    Enjoy Holland!

    Peter

  • http://www.marketingsorbet.com jeff fromm

    we have fired clients in my past multiple times — once it was one of our largest income clients.

    the issue is pretty simple — if you aren’t getting treated fairly (money, gross margin, work product, working relationships) then why would you stay in the relationship over the long term.

    relationships take work — whether that’s your marriage, your significant other or business relationships. invest in the relationships that will last.

    my comments only represent my personal views.

    Jeff
    jfromm@adamson-usa.com

  • http://www.arthritistreatmentlab.com Jacee

    i am hoping that the global economy would recover from this economic recession. life has been very hard with these massive job cuts.

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