Business is about avoiding "toxic" customers and having the "right" customers

Choosing the right customer is not a luxury. It is a requirement !

A professor of operations recently told me; "You marketing people said that a customer is the king and the center piece of any business. Would you therefore advise a business to accept and serve any customer that chooses to come along?". I realized he had me there ! If strategy is about making choices, one of the most important choices you need to make in marketing is the very reason for you to be in the market - what type of customer you will serve. By making this choice, you also automatically choose its implication - what type of customer you will not serve.      

FROM LOSS TO PROFIT

I know of a B2B service company which went from making losses to making profits. One of the main cornerstones of their turnaround strategy was clear guidelines about what type of customers will the company go after and what type of customers it will not waste time on. I know this case intimately and just this bit made a huge difference. Within a time of mere two months the atmosphere in the company turned positive when the whole organization began realizing what a difference this choice made to the morale of the business development people and operations people.

Counter intuitive - sometimes throwing out the customers you do not want, improves business results. The CEO of a company said recently "I used to see red when a certain client was on the phone. The client made us jump through the hoops and fire unnecessarily and tired us completely. We were doing more work for her business than what we did for the other top 4 clients of ours put together. It was not easy but I decided to sack the client". And what do you think happened ? The morale and productivity of employees went up, its service level to its good customers improved and they responded by giving more work to the company.

WHO IS THE "RIGHT CUSTOMER"?

The lesson is not to fire bad customers but to choose the right customers in the first place.  So who is the right customer ? First and foremost, the right customer is the one to whom your uniqueness and competency can make a big difference - in a way that your competitors cannot. The fundamental truth hidden in this statement is that intrinsically there is no wrong or right customers - they become so only when you know your own competencies. The wrong ones are the customers to whom your uniqueness does not make much difference. 

If you are designed to create high quality products and if your sales department recklessly brings in more customers who do not value quality but only price, you will find yourself inundated with frustrated business development people pressuring you for more discounts, irate cost accountants asking you how you will meet profit targets, customers nagging you for price and delaying your payments. All because you went after wrong customers. 

In fact, your choice of customers is a very important part of your strategy because ultimately a business can practice only that strategy which its customers permit it to. A company cannot be in search of better quality if its customers are in search of lower price - it is an unstable situation. 

While choosing your customers make sure they are (a) not too small ( less than 5% of your existing sale) : small customers increase the cost of serving  them (b)  not too large ( not more than 25% of your existing sale) because big clients cause havoc if they leave and cause an unbearable shock . If they stay they behave as if they have bought your body and soul  (c) not unprofitable : sometimes big clients ask for discounts and credits and rework - such that in the end they may contribute to the revenue but not much to the profit (d) not obsolete and heading towards sunset themselves : if your clients are from industries which are in long term decline - or which are becoming non-remunerative due to hyper competition - your own long term prospects are suspect (e)  the ones that will make you expert in the area you have chosen for your future - they will help you gain the right competencies, help you along your selected path and accelerate your progress on the path you have envisioned for yourself.