Fire Low Margin Customers as a Pricing Strategy? Not a Good One. | Strategic Pricing Solutions
A somewhat popular tactic of companies looking to improve their margins is to identify their low-margin customers and fire them. They don’t go Donald Trump on their customers and say “You’re fired.” Instead the companies jack up the prices of those customers to either drive them away or make them profitable. Some companies even erroneously think that is a pricing strategy. But is that really a profitable tactic? In our view, that tactic is often more harmful than helpful. The real answer is you need to understand much more about what the customers are buying, why the margins are low, and their incremental impact on profitability before changing their prices.
Often times the suggestion to fire customers comes from the finance team as a result of an analytical review. In particular, it is fairly common for finance teams to look at the top and bottom 10% of customers in terms of gross margin or margin percent. It is easy to isolate the bottom customers and develop a plan to “fix them or fire them.” It is also common to review rate-volume-mix reports and identify customers with a product mix-shift to lower margin products, who are then candidates to be fired. A third source of targets for attention comes from looking at customer profitability reports generated by activity based costing (ABC) systems, and identifying the negative profit customers. All of these sources are worth looking at as starting points, but by themselves should never be a reason to significantly increase prices.
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Fire Low Margin Customers as a Pricing Strategy? Not a Good One..
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