There are two schools of thought when it comes to whether it's a good idea to “fire” a customer.

One view is shared by a consultant who, years ago, told us, “It is never a good idea to fire a customer.” Instead, he suggested, the distributor should work with the customer to unbundle services and identify other ways to make them profitable.

However, there are a number of other distributors we've talked to in the past few years who told us they have, indeed, fired customers they deemed unprofitable.

GHX Inc. is one of those companies that has achieved remarkable success by using activity-based costing to determine their most profitable customers and eliminate those that aren't meeting profitability goals. (See story on p. 22)

In the past seven years, GHX, a hose and accessories distributor based in Houston, closed nearly 1,000 open accounts to focus on its remaining, profitable customers.

“We're targeting 150 customers rather than 2,000,” says Dan Ahuero, president of the $50 million company. “It's a dramatic change in your business when you find out that 90 percent of your profit comes from 150 customers out of 2,000, but those customers made up 40 percent of your transaction costs. That means more than 60 percent of what you were doing accounted for 10 percent of your profit.”

As a result, GHX has grown its business and engaged in superior customer satisfaction.

Other companies we've talked to recently have undertaken similar plans. A distributor in the Northeast told us that after reviewing his accounts, he fired a substantial number of customers simply because he wasn't—and couldn't—make money from them. By targeting profitable customers, he's selling more to those remaining accounts and reducing his transaction costs.

A quote from a distributor a few years ago points out the difficulties faced by many distributors when it comes to identifying profitable customers. “One of the problems many distributors have today is that they look at sales dollars and confuse sales with profit and think that profit flows from sales. It doesn't. It flows from margins.”

Whether you agree or disagree about firing customers, it's imperative that you determine exactly what it is costing you—in time and money—to keep that customer as an account.

jkeough@reedbusiness.com