Keep the Wrong Customers XXXIV

I come before you today with the solution to a grave national crisis.  This crisis vexes both Democrats and Republicans, liberals and conservatives, Jews and Gentiles.  Why do we have tragedies every spring like the Boston Bombers and the Virginia Tech shooter?  The answer is simple.  There is no NFL football in the Spring.  In November, there's no talk of anarchy or jihad.  All are busy watching RGIII stomp the crap out of the Dallas Cowboys.  We are then truly one nation, under RGIII, indivisible with liberty and justice for all (except Cowboys fans).  You are welcome.

My business partner, Paul, and I take pride in our ability to serve and satisfy difficult clients.  Clients, who jump from one CPA firm to another stay with us for years.  We listen carefully to their complaints and develop custom solutions to their problems.  We shower them with attention and cheerfully meet unreasonable expectations.  We are paragons of customer service.  We are stupid.

 These difficult clients may stay with us for years, but they are rarely truly happy, and neither are we.  Our pride costs us money.  At the altar of 100% customer satisfaction, we shall sin no more.  Bad customers cost money.  Here's why.

Imagine starting a life insurance company.  You collect premiums from the living, invest the premiums, and pay out benefits to the heirs of dead customers.  You start out with all sorts of customers, young and old, male and female, from the east and from the west, a diversified group.  Then you attend a seminar on niche marketing.

The seminar leader, the guy who came up with New Coke, convinces you to identify customers with a burning need for your service.  Who needs life insurance more than.....terminally ill cancer patients?  So you spend your entire marketing budget blanketing cancer treatment centers with special offers - 50% off the first year premium for anyone with bladder cancer.  45% off for pancreatic cancer and so on.

Your sales skyrocket from your marketing genius.  However, within a year, your benefit payments exceed your policy premium revenue.  This won't work.  So you raise your premiums across the board.  After all, it wouldn't be fair to just raise your premiums on cancer patients.  Everyone should bear the pain of their loss.

After another year, you look at your customer base and discover this amazing fact.  90% of your customer base is terminally ill.  Why?  Well dummy, you raised the prices on healthy customers, who then went elsewhere to find cheaper premiums.  Your concentration on cancer patients drove off your profitable customers, healthy young customers, in favor of your unprofitable dying ones.

The insurance industry has a technical term for this, adverse selection, defined quite simply as unwittingly keeping bad customers at the expense of good customers.  This is what we have done in our extraordinary efforts to satisfy bad clients.  We waste time on unprofitable clients that would be better spend satisfying our good clients.  Here's an example how this happens, all very unintentionally.

Near the end of tax season around 6 PM, I got a call from a great client.  He doesn't gripe about fees, pays on time, and has reasonable service expectations.  By 6 PM that day, I had talked to probably twenty people by telephone.  Late tax season brings out a particular brand of crazies, who call once a year to ask ridiculous questions like, "How can I get my mistress on the payroll?"  Rarely do these idiots become decent paying clients.  They just suck up time and energy when we have neither.

So what was my attitude as I reluctantly answered the call from my good client? Probably not good.  I wasn't focusing my best energy on listening and resolving his problem.  The effort spent on the crazies crowded out my efforts to serve a great client.  None of this was intentional or even conscious.  This certainly happens to you as well.

There are two steps to solving the problem.  First, identify the characteristics of bad customers and remove them from your customer base.  Second, identify the behaviors of good clients and reinforce them.  I will cover the first today and the second in my next post, which will feature Pawan, the amazing IHOP waiter.

There are two characteristics of customers you should terminate.  First, they make you miserable.  Maybe they have unrealistic expectations.  Maybe they consistently pay late.  Maybe they are just assholes.  Any of those reasons suffice.  If you aren't happy serving a customer.  He has to go.

Joes was a first year client for us this tax season.  He had corporate, partnership, and personal returns for us to prepare.  He had the characteristics of a good long term client for us, lot's of work to do and a reasonably complex situation.  He was working with Christie from our staff.

Joe's bookkeeping wasn't exactly done when we started working with him.  Christie had a lot of work to do in a short time during our busiest month of the year, March. She got the corporate and partnership tax returns completed and sent Joe drafts of the returns.  She made some comments with the draft about changing some practices for the future, specifically the need for Joe to take a reasonable salary from his corporation.  The salary would also allow him to make a pension contribution based on the salary for 2013.  This was a great idea for 2013 but a lousy idea retroactively for 2012.

Taking a salary for 2012 made no sense since he would incur substantial penalties in March for not paying taxes and filing payroll tax returns which were due in January.  Nonetheless, he wanted the returns revised to reflect a salary for 2012 despite the penalties.  So Christie revised the returns and sent him another draft.  Upon seeing the payroll tax balances due, Joe then wanted the returns changed back to the original versions.  All of this happened in the last two weeks of March, when Christie needed to work on personal tax returns for other clients.

Then he complained about the bill.  He didn't want to pay for revising the returns and then putting them back the way they were.  Joe was not only a pain in the ass.  He kept Christie from working on returns for good clients, who had to wait to get their work done while Joe screwed around with his.  This week, Joe gets "the letter."  The letter politely says, "Hit the road, Jack, and don't you come back no more, no more, no more, no more...'"

Ann has been a client for a few years.  Her tax returns are very simple, basically a Harry Homeowner special, mortgage interest, real estate taxes, and not much more.  This year Ann inherited money from a relative's 401(k) plan.  She wanted me to prepare two drafts, with and without the 401(k) distribution, no big deal.  I prepared both drafts, sent them to Ann, and gave her the results in written form both with and without the distribution.  Simple as pie - well maybe not.

I got a nasty message from Ann telling me that I had done a lousy job giving her the results.  She couldn't understand how much the distribution was costing her.  She couldn't manage the math of taking the results with the distribution and subtracting the results without the distribution.  So I tried again, this time giving her the results without the distribution and then telling her how much the taxes increased as a result of the distribution.  Then I got another nasty message telling me she couldn't understand this either.

So I called her by telephone and tried explaining the numbers.  By now, she had emotionally shut down and just wasn't in the mood to listen.  I wasn't in the mood to receive another blast of attitude either.  Finally, I completed the tax returns and prepared the bill.  Looking at the time records, we were getting $350 for $600 worth of my time, not an acceptable result.  I reviewed the time records for the previous two years and saw that her returns were not profitable either of those years.

Ann isn't a rotten person.  Here attitude was an exception for her, not her usual behavior.  Nonetheless, she gets "the letter."  We just can't make money providing service to her.  She needs more time and attention than her situation warrants.  I can make more money serving other clients.

Bad clients come in two forms: jerks and the unprofitable.  You can afford neither.

Today is the seven month anniversary of the day I realized that God has a plan for the later years of my life.  That plan is for me to sit in my recliner every autumn Sunday afternoon with a beer in my hand watching RGIII smoke the NFC East.  Praise be to Allah!

Thanks for reading.  As always, you can find "How to Screw UpYour Small Business" on Facebook with a couple of snarky posts daily.  Until next time, let's do it to them before they do it to us.