Archive for November 17th, 2009

There was a very inter­est­ing arti­cle in last Tuesday’s (Novem­ber 10) edi­tion of The Wall Street Jour­nal. It is enti­tled, It Just Isn’t Work­ing? Some File for Cus­tomer Divorce, and it relates how some small busi­nesses are elim­i­nat­ing prob­lem­atic customers.

In the paper edi­tion, the arti­cle appeared under the “Small Busi­ness’ ban­ner, and it now resides under a similarly-​labeled sec­tion of the web site; how­ever, it applies equally well to busi­nesses of all sizes.

We must admit, though, that the topic is espe­cially poignant for small busi­nesses because the decision-​maker and the imple­menter (exe­cu­tioner) are often one-​and-​the-​same per­son, and the cus­tomer may be a friend or acquain­tance. There’s no, “my boss told me that I have to do it” excuse when you are the boss. Note, how­ever, that many seemingly-​independent, entre­pre­neur­ial men still use their wives as rea­sons why some­thing can’t be bought or sold at a given price. We would never admit to such behav­ior, unless our Chair­man, Jill, per­mits us.

The main point of the arti­cle is that despite gen­er­ally tough eco­nomic times, a few small busi­nesses are find­ing that it is not worth­while to deal with cer­tain clients because those clients dis­pro­por­tion­ately con­sume time and resources given the rev­enue that they generate.

Dis­ci­pline! Discipline!

Though we sound like Colonel Hathi from The Jun­gle Book, there are a cou­ple of obvi­ous ways to min­i­mize the prob­a­bil­ity of enabling such problems:

1. Don’t appear too des­per­ate or too needy for the busi­ness. (In that sense, it is a lot like dating.)
2. Eval­u­ate the client, and have a slid­ing scale of prices rang­ing from lower prices for easy clients to higher prices for pains-​in-​the-​butt or annoy­ing ones, and stick to it.

Admit­tedly, such tac­tics may not be fea­si­ble with all prod­ucts and ser­vices. They gen­er­ally work bet­ter for ser­vices than prod­ucts, and for cus­tomized ser­vices, rather than uni­form or generic ones, and for short-​term projects rather than long-​term ones. How­ever, unless there is a sub­stan­tial ben­e­fit that can be derived from either exist­ing or prospec­tive clients because of the rela­tion­ship with a tire­some one, the tire­some one should pay for the irri­ta­tion, aggra­va­tion, dis­com­fort, and effort that they cause. (We’ll qual­ify this a bit below.)

If such cus­tomers are not will­ing to pay, then the sup­plier or ven­dor is, in fact, sub­si­diz­ing the oppor­tunis­tic behav­ior. More­over, if the sup­plier is not will­ing to sever the rela­tion­ship (or take actions that will change the other party’s behav­ior and prof­itabil­ity), then we humbly rec­om­mend that they not com­plain to every­one around them (thereby mak­ing their employ­ees’ and fam­i­lies’ lives more mis­er­able than need be).

That may seem a bit harsh, but it is con­sis­tent with our response when some­one com­plains about a spouse: divorce them, kill them, or shut-​up. Revealed pref­er­ence says that despite the com­plaints, if the ven­dor is unwill­ing to sever the rela­tion­ship, then he or she must find the arrange­ment to be accept­able. Some­times it is nec­es­sary to do unpleas­ant things – not immoral, uneth­i­cal, or ille­gal, just unpleas­ant ones – to get what one wants out of life.

So, be a good stoic, and live with it in silence (or turn it into a blog post).

We pre­fer to main­tain pric­ing dis­ci­pline because at the mar­gin, one’s will­ing­ness to lower the price or fee is often viewed as a sign of weak­ness. So, clients who make that infer­ence then often request more time and/​or resources. That means that a sign of weak­ness harms both rev­enue and resource-​usage, espe­cially for ser­vices that are pro­vided over time. (Note that this prob­lem can be mit­i­gated some­what by offer­ing a lower-​quality or less-​robust sub­sti­tute when­ever some­one wants a lower price, i.e., “we’ll lower the price, but you’re not getting…”)

By the way, another option is to write very, very detailed con­tracts, but those prepa­ra­tion costs only add to the resource con­sumed by such cus­tomers, and cov­er­ing those incre­men­tal, transaction-​related costs increase the nec­es­sary price to make the trans­ac­tion “worth­while.” (You can see why many folks open fran­chises where such devel­op­ment and prepa­ra­tion costs can be shared nation­ally or even globally.)

Two Costs to Consider

Before fir­ing a cus­tomer who is thought to be “unprof­itable” be sure to con­sider a few fac­tors to deter­mine if the cus­tomer is truly unworthy.

Clearly the choice of fir­ing or retain­ing a cus­tomer is a deci­sion, or the selec­tion (and imple­men­ta­tion) of one pos­si­ble alter­na­tive from sev­eral avail­able alter­na­tives. (Note that “do noth­ing” is often an avail­able course of action.) So, rather than be con­cerned with the report­ing of finan­cial results, or account­ing, per se, we are inter­ested in the costs and ben­e­fits that vary across alter­na­tives, the rel­e­vant costs and ben­e­fits.

In par­tic­u­lar, we are inter­ested in

1. Expected Rel­e­vant Ben­e­fits and Costs
2. Expected Oppor­tu­nity Costs

Note that these costs may vary through time as cir­cum­stances and capac­ity uti­liza­tion change. Tech­ni­cally, oppor­tu­nity costs, which we’ll define below, can be cat­e­go­rized as rel­e­vant costs, but we think that they are wor­thy of their own place on the list.

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