Fed Ex recently dropped Amazon, the #1 e-commerce retailer, as a customer. Shocking, perhaps. Foolish? Not in the least bit.
An era of “customer-centricity,” “customer experience,” and, “the customer can do no wrong” has led many leadership teams astray. They have forgotten that not all customers matter and some customers are not even worth keeping.
FedEx’s move to drop Amazon was smart for several reasons. First, it was dropping a customer who likely demanded extra attention for under-market margins. Second, Amazon is investing to become independent of FedEx. Third, the move placed some stones in Amazon’s path forward. Finally, the step allows … or maybe forces … Fed Ex to focus on serving other e-commerce companies better to replace the lost revenue.
Since Amazon’s business represented less than 2% of Fed Ex’s revenue, exiting Amazon was not that painful. But the move would have made sense even at higher lost revenue levels.
Like FedEx, there are times when you should evaluate dropping a customer, even if they represent a significant portion of your revenue. Here are some:
The customer demands investments that detract from investments for more strategic customers.
A Wisconsin-based commercial sewing company, Dowco, served both the medical equipment (e.g., tables for CT machines) and power sports vehicle (e.g., motorcycles) markets. The company’s most significant opportunity for growth and differentiation rested in the latter market. Medical-market customers started making demands that would require the sewing company to invest in equipment of no value to power sports vehicle manufacturers. Because investment funds were limited, the company elected to exit the medical market and focus all investments in more lucrative opportunities.
The customer, taking all costs into account, is not profitable.
Many ad agencies have “anchor” customers whose revenue pays an agency’s fixed costs. But when the anchor customer creates steady havoc, making it hard to serve other customers well, it’s time to find a different anchor. Remember, opportunity costs (what you lose by doing something) are part of the cost equation.
Some companies look at groups of customers to decide if they are worthwhile. Should you serve a target market where you hold a small share? Or, are low revenue customers collectively worth all the SG&A resources they require? Be careful, however. Do not throw out the baby with the bathwater. There may be a more profitable way to serve small customrs, e.g., with longer lead times so you can run their orders during lulls in production for larger customers.
The customer hurts your brand reputation.
Facebook lost the trust of its platform users by keeping customers who spread false information. If Facebook wants to be our media platform, it had better improve its curator work going forward. It should drop customers who advance fake news that undermines medical care, politics, and society. If they do not, watch better-monitored platforms emerge.
The customer acts in ways that are against your core principles.
If you want your values to be trustworthy guiding principles and not platitudes, monitor customer behavior. If a customer wants to engage in bribes (an illegal activity) drop the customer. If a customer regularly acts in disrespectful ways towards your employees, exit the customer.
The customer will become your competitor.
Can your customer easily vertically integrate into your company’s offering (as Amazon is doing to FedEx)? Evaluate if you are better off exiting now rather than later when the customer drops you.
For example, many graphic arts and finishing companies (i.e., those that do die-cutting and embossing) depended on printers for all their orders. Soon, those printers began offering the graphic and finishing services directly. To combat this trend, a Madison-based printing company named MCD built a winning position. They moved into finishing plastics (versus paper alone) and sold directly to end-customers (versus relying on printers for customer orders).
Yes, be customer-centric, but only around those customers that truly matter.