Firing a Customer - Part 2

     Our friend Khatchig Jingirian fired a customer. 

     It happens more than most people probably believe.  It definitely happens with larger corporations more than most people probably believe.  Two examples come to mind from the clothing industry.  Not only from the clothing industry but from two companies that are best known for men's pants:  Levi's and Bill's Khakis. 

     First a bit about both companies. 

     The iconic and eponymic Levi Strauss company was founded in 1853 during the California gold rush.  Young Levi Strauss went to California with a supply of canvas with the notion of making tarps and tents for the miners.  When asked if he could craft a pair of durable pants by a miner, he did so out this the canvas he had.  He did so using copper rivets to reinforce the pockets.  The pants were durable but not very comfortable.  They chaffed and the miners complained.  The resourceful Levi switched from canvas to a softer but still durable twill cloth from France called serge de Nimes.  These de Nimes or denims as they came to be known, were the perfect match of durability and comfort with the comfort factor growing over time.  

     Bill's Khakis, www.billskhakis.com, Bill's Khakis was founded in 1990 by Bill Thomas on almost the same principles as Levi Strauss founded his jeans company.  Bill had bought a vintage pair of World War II khakis in a military surplus store and was impressed by their comfortable fit.  Bill also surmised that these Khakis were made of better material that was thicker and tougher than modern twill pants.  He wondered how we had lost this ability to craft these quality pants and, voila, Bill's Khakis was born.  He set up a company on high quality and where all cutting and sewing is done in the US.  His pants are pricey but they last perhaps looking even better with the passage of time.  As a result, Bill's has a very devoted base of customers.  

     Our principal, Mark Gavoor relates two stories about these two companies, both founded on quality, essentially firing their customers i.e.  stores that sell their products.  The stories are very similar.

     When I lived in Wilton, CT, there was a men's shop in town.  They were medium to high end and had carried some great brands.  Being a natural bargain hunter, I really only shopped their summer sale and always bought a few items.  One year I bought a pair of Levi's at the sale.  The next year, I went again looking for another pair perhaps in a different color.  I did not see any on the sale rack.  So, I asked the sales manager who happened to be the closest employee.  He told me that Levi's had informed him that they would no longer be able to buy product directly from them.  So, instead of reducing their margin by going through a distributor, they decided, with some trepidation, not to carry Levi’s any more.

     Fast forward to 2013 in a North Shore suburb of Chicago and another higher end men's boutique that was based on personal attention.  Their casual pant line was Bill's Khakis.  The owner felt they were the best product.  They had the best quality and were thus the best value for his valued customers who shopped his store by appointment for one-on-one personal shopping and fitting.  They were recently informed by Bill's Khakis that they were no longer going to be able to buy from them.  It was almost the same scenario.  

Consumer Products companies are always looking at their customer base and profiling the order flow and profitability of customers.  They set thresholds for customer profitability and move customers below the profitability threshold to distributors.  This often translates into companies shedding their smaller customer and focusing on their larger customers.  

     Often this is done for both volume and logistics.  Distribution centers operate much more efficiently if the minimum order quantity of any item is a pallet and the minimum shipment size is a full truckload.  Small customers do not easily meet these logistic thresholds and thus do not meet volume and profitability thresholds and thus they are essentially fired.  This firing phenomena has in part contributed to the demise of the family owned pharmacy.  The buying power of CVS and Walgreens and their being fired by the consumer products companies accounted for the prices being higher and the shelves not as well stocked in these small family owned stores.  

     This behavior defies the basic logic of business that revenue is good.  It seems counterintuitive to pawn customers off to distributors.  In a world where both revenue and margin is important there is a breakpoint.  Having accounts below that breakpoint make sense to service through channels that are more profitable overall.

     Some businesses do not necessarily fire customers but are very selective in the customers they take on.  A nationally known cancer center is often associated with selectively taking patients to keep their survival rates high.  This means they turn away people that they know will die in order to maintain a survival rate advertising claim?

     Early in career, Mark Gavoor recalls, a consulting company that gave a capabilities presentation to him.  After the presentation and a lengthy assessment discussion, the consulting company said “our reputation is based on 100% success in our quality transformation process.  Your organization is not ready.  You will waste your money and we will compromise our reputation, thus we are not going to give you a proposal.”  This was either the most honest and forthright consulting company ever or this was the best sales pitch ever.

     There are many cases of firing customers and not taking on customers.  There are both good and questionable practices in these regards.  It makes sense to think ahead in this regard and have a policy that makes sense to both customers and staff.  

     Khatchig’s model and example is a good place to start.