It's Time To Fire Some Customers...
As I write this, it’s Q4 of 2022, and the year isn’t material to my thoughts here, but rather the time of year. If you’re like many MSPs, the fourth quarter of the year begins your preparations to renew expiring Managed Services agreements with your clients to continue your business relationships in the new year. But beyond that, it’s a time for reflection and fine-tuning your growth strategies for the following year.
This growth planning should include candid evaluations of not only challenging external business factors and internal operational issues and plans to address them; but also an honest appraisal of every client relationship for its suitability for you to continue it. Documenting and ranking clients into “A,” “B,” and “C” categories (with “A” being best) is an excellent first step in developing an understanding of what you consider the most and least attractive traits of your overall client base. Some of these traits may include:
- Cultural fit
- Business growth potential
- Strategic leadership
- Values your guidance
- Budget
- Revenue generated
These traits are in no particular order, and you will most likely add more to the list, weighing each value according to your own preferences. After you’ve determined your evaluation criteria and applied them to each client, you can more objectively establish whether they fall into the top, middle, or bottom third of your client list.
The next step can be difficult, as it requires you to determine which of your “C” customers you can no longer justify moving forward with (from now on, I’ll designate clients as “A” and “B” and customers as “C”). The first time I did this in my own MSP practice, I struggled with it (I sold that practice in 2007). It was tough for me to get over two aspects of this necessary business exercise – one, I was worried about losing the revenue that these customers represented, and two, I really didn’t relish the conversations I would have to have with them to let them go.
But after executing this strategy for the first time, I did it every year afterward with much less anxiety because I learned a couple of things that surprised me. The first thing I learned was that, although we lost some top-line revenue, it was by far our lowest-margin revenue. In fact, in many cases, I discovered that we were actually losing money on many of those customers we fired when I analyzed our financials after that first exercise. This really surprised me. Now don’t get me wrong, I knew these were typically our least profitable customers, but I had no clue that we actually lost money on them. By the way, they also represented our noisiest customers, the ones we had the most customer satisfaction challenges with, and the ones that tended to argue every invoice and charge – and many succeeded at having us reduce our charges, write off items on some invoices and request or demand on-site visits from us for services that could easily have been delivered remotely.
The second thing I learned was that firing these customers noticeably improved my staff’s morale and my own. We reduced the noise and stress of dealing with customers that didn’t fit our ideal client profile. By setting this strategy in motion, my staff knew that we were maturing as an organization and would only be taking on new “A” and “B” clients in the future.
The third thing I realized was that these “C” customers that we fired were taking up a valuable spot in our client list that prevented us from taking on more “A” and “B” clients. In fact, I might argue that in some cases, we could serve two similarly sized and categorized “A” clients more efficiently and certainly more profitably than one poor “C” customer.
This was when I began to see my role as that of a professional sports team coach building a team to win the championship every year – in the sense that you have to make player trades to get there. No matter your favorite sport, there are opportunities for the team you root for to rejuvenate the team with new players through trades and drafts. In this exercise, you are the coach, and your “C” customers are the players you need to trade to make room for the new “A” and “B” clients you will take to next year’s championship.
I mentioned earlier that this exercise got easier for me after the first time, as it will for you. Once I established what “A” and “B” clients looked like, we actively recruited new ones and turned away any prospects that were “C”s. We were also able to spend more time with our “A” and “B” clients (and bill them for it) to have more valuable strategic technology meetings and measure our business relationship and performance together objectively, aligning our goals and enforcing shared accountability. This increased client satisfaction, grew more profitable revenue, and reduced churn.
Takeaways:
- “C” customers are your noisiest and least profitable
- Firing “C” customers improves staff morale and efficiencies
- “C” customers prevent you from serving more “A” and B” clients
- It’s Q4, and it’s time to fire some “C” customers
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