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You’re fired! How to get rid of bad customers

Entrepreneurs show clients the door for many reasons, especially if they are unprofitable or a pain to deal with.
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Not all entrepreneurs would have the guts to ditch nearly a third of their company's revenue. But that's what Noha Waibsnaider, CEO of Peeled Snacks, recently did when she gave several grocery chains the boot. In tough economic times, pruning clients may seem unthinkable, but as Waibsnaider learned, some customer relationships aren't worth keeping.

When Waibsnaider founded her Brooklyn, N.Y.–based company in 2005, she envisioned convenience stores, rather than supermarkets, as the primary retailers for its dried-fruit-and-nut snack packs. Demand from grocery stores rose steadily, however, and she eventually decided to pursue distribution there. "We were partly sick of saying no," Waibsnaider says. Peeled Snacks began selling its products in Whole Foods' Northeastern locations in the fall of 2007 and from there expanded to regional chains, including Lunds and Byerly's in Minnesota and Gelson's in California. There was a big bump in sales — in 2008, grocery stores accounted for about 30 percent of the company's $550,000 in revenue.

The new customers, however, turned out to be a headache. Grocery stores charge fees for placing products on shelves, and they expect periodic discounts and commitments to in-store sampling events. Those expenses narrowed Peeled Snacks' profits to mere pennies for each $2.49 bag of its snacks, whereas it earned almost 50 percent of the retail price in some convenience stores. Plus, Waibsnaider experienced difficulty in getting her products stocked. On a few occasions, her employees would go into stores and discover that Peeled Snacks weren't even on the shelves, the result of miscommunication between the grocery buyers and their distributors. "It was a long chain of telephone," says Waibsnaider.

Those episodes, coupled with the erosion in profits, persuaded her to pull out as soon as her contracts expired. She preserved agreements with a few Whole Foods locations, where sales were highest, to maintain brand visibility. "With the economy down, now isn't the time to invest in expensive channels," she says. "So we backed away from most of it."

Entrepreneurs show clients the door for many reasons. Janine Popick, founder and CEO of Vertical-Response, a San Francisco company that provides e-mail marketing services, decided she needed to focus on her company's core customer base. In VerticalResponse's early days, Popick rarely turned down a customer's request. But after diverting nearly all of her company's manpower to an advanced e-mail sorting tool built solely for one large client, Popick decided it was best to part ways with that client. "It was a tough pill to swallow, because they were one of our top five customers," she says. "But I approached them and said, 'Look, guys, we can't keep maintaining this and ignoring our other customers.' "

Now, VerticalResponse considers developing a new feature only when at least 20 percent of clients request it in customer surveys. Popick holds her ground with large customers that demand services that others are unlikely to use. She has even referred a few customers that have grown in size to providers that cater to large corporations and assisted those clients in making the transition. Although letting go isn't easy, Popick says helping them land on their feet elsewhere ultimately benefits her company. "Chances are when someone comes to them, they'll send them our way," she says.

It may be worth going the extra mile for certain customers, however. Dan Ahuero, CEO of Houston-based GHX Industrial, which manufactures and distributes hose and gasket assemblies for energy companies, categorizes his customers' accounts based on gross profits. The most profitable customers receive perks such as free delivery and 24-hour service. Less profitable customers, on the other hand, might pay extra. Ahuero says the system has allowed GHX to focus on core customers and increase sales. Last year, the company's revenue was $86 million, up from $50 million in 2007.

Keeping such close track of customers also helps Ahuero mend relationships before they go awry. If the service required for a particular account has become too costly, the company will first review its work with that customer to eliminate inefficiency. For instance, a customer might have placed separate work orders that could have been combined, or a series of after-hours repairs could have been fulfilled earlier. But if a customer has significantly reduced purchasing, bringing the account back to profitability may require raising prices or cutting certain services. "If you have a good relationship, most of the time, the customer will work with you," Ahuero says.

Certain situations, however, call for a more rigid stance, he says. Allowing a habitually late-paying customer to freeload on services, for instance, drains company resources. GHX now maintains open accounts only for its most lucrative customers and requires other clients to pay by credit card. At VerticalResponse, Popick has taken a similar position, requiring all customers to pay by credit card. "We don't have the manpower to chase down a $100 invoice," Popick says. "So we let go of the customers who didn't pay, and then we changed the process."

Not all dealbreakers are based on money alone. Popick refuses to tolerate customers who verbally abuse VerticalResponse's customer service representatives. Although she will contact disgruntled customers directly to find out why they may be dissatisfied, she says she will not retain a customer at the expense of employee morale. "It goes to the company's values," she says. "No one should have to take a beating."

Going back to her company's foundations has ultimately helped Waibsnaider determine her company's best customers as well. She has refocused on gaining customers in "grab and go" locations such as gift shops, gyms, and movie theaters, an effort funded by the cash that formerly went toward costly grocery promotions. Waibsnaider says sales are on track to double this year, to $1 million. "We felt our brand was all about convenience," Waibsnaider says. "We're going back to that original strategy."