Customer Elimination Decisions

Learning Objectives

  • Create a report outlining the data to support a customer elimination decision

Not all customers are good customers. Unfortunately, some, regardless of how much you charge for your services, do not add to your net profit.  Let’s look at an example from the service industry:

So, you are the manager at a local CPA firm. You have three large clients, but you are determining if each of these clients are creating a profit for your firm, or if one should be eliminated. This is a tough decision to make, and there are lots of pieces of the puzzle to review. Let’s look first at the revenue brought in to the firm for each client.

  • Customer A: $25,000.00 in revenue
  • Customer B: $32,000.00 in revenue
  • Customer C: $37,500.00 in revenue

You might be looking at this, thinking, “why would we eliminate any of these customers? Look how much revenue they are bringing in to the firm?” But remember, there are other things we need to consider.

Let’s say we were talking to our administrative assistant. She let us know that Customer C calls every single day needing a copy of a document that they lost, or a form they need to submit. Customer C also stops in to the office frequently to chat with the front desk staff, keeping them from their work.

On the other hand, customer A is the ideal client. Their books are all in order when they bring them in for tax preparation. They only call if they have a question to help streamline their processes, which helps us with the work we do for them.

So, let’s look at the quantitative (the money part) now:

Elimination Decision: Evaluation of Customers
Totals Customer A Customer B Customer C
Revenue $94,500.00 $25,000.00 $32,000.00 $37,500.00
Expenses
Rent $5,000.00 Not relevant Not relevant Not relevant
Utilities $2,000.00 Not relevant Not relevant Not relevant
Copies $1,000.00 $50.00 $250.00 $700.00
Admin Staff $15,000.00 $1,000.00 $5,000.00 $9,000.00
Front Desk Staff $15,000.00 $1,000.00 $5,000.00 $9,000.00
Accounting Staff $35,000.00 $8,259.00 $7,556.00 $19,185.00
Net Income $21,500.00 $14,691.00 $14,194.00 $(385.00)

So, now you can see, Customer C is really not bringing in anything at all! They are actually costing the firm money.

Now, you might ask, would we get rid of those staff people if we got rid of the client? We would not. We then have several options. We could fill in with a new client. We could develop a different component of the business, such as expanding our tax preparation or bookkeeping services with that extra time. Essentially, we will need to secure replacement business, but does it make sense to keep a client who is costing us money? Oh, and if you go back and take a look at those qualitative issues, it makes more sense yet to get rid of Client C!

Practice Questions