Customer Success: How to Quantify the Impact of Bad-fit Customers

August 26, 2020 Article by Lincoln Murphy

What’s the cost of working with Bad-fit Customers? Everything rolls-up to dollars… time and other resources – and even the negative sentiment in the market caused by churning-and-burning customers – all have an associated monetary value.

For those who wrongly consider Customer Success an altruistic endeavor, rather than a profit-seeking business strategy, you will want to try to make Bad-fit Customers successful at any cost. You’ll want to, but you can’t. That’s why we call them Bad-fit Customers.

I put this guide together for the rational person who knows intuitively that investing resources into Bad-fit customers (customers that lack Success Potential) is, well, bad for business. You get this. You understand this. But you don’t know how to prove it.

Well, now you do. And by “now” I mean after you read this.

Go. Read this.

7 Steps to Quantify the Impact of Bad-fit Customers

“In God we Trust. All others bring data.” – W. E. Deming

If you want to be taken seriously in your mission to prove that Bad-fit Customers are costing the company MORE than they are making the company (i.e. they are not profitable), you can’t just go to your executive leadership with a hunch or opinion.

You must bring data, and those data (because ‘data’ is plural) should roll up to a monetary value, which is the language business executives speak. It’s all about money, like it or not.

The idea here is to be able to go to your executive leadership with a compelling, logical, and quantifiable case that backs-up the need to stop acquiring Bad-fit customers.

My standard disclaimer: As with everything I publish, this is just an article. It is necessarily incomplete and generic. I cannot tell you exactly what you should do and if someone who doesn’t know your business and your customers tells you exactly what your processes should look like, run away. Run far and fast.

  1. Create your Success Potential checklist
    1. A Bad-fit customer is one for whom we cannot check all the boxes on the Success Potential checklist
    2. Remember, your Success Potential checklist will change as your market, customers, product, company, etc. changes.
      1. It’s never done; it’s a living, breathing document
      2. When this changes, customers that were a Bad-fit might be a Good-fit
      3. But customers that were a Good-fit might become a Bad-fit, depending upon the change
  2. Go through customers that churned in the last 3-6 months (depending upon churn velocity, contract lengths, etc.)
    1. Tag those that match the current Bad-fit definition as, well, Bad-fit
      1. If you’re looking at churn back 6 months, but your Success Potential checklist changed 3 months ago, you’ll have to look at the previous 3 months using the Success Potential worksheet from that time frame rather than today’s definition
      2. These changes are FAR more likely – and are likely more frequent – in the COVID era, so adjust accordingly
    2. If some large amount – let’s say 75% for example – of the customers that churned are marked as Bad-fit, that’s a fairly strong piece of evidence that sales is closing the wrong customers
      1. The actual percentage doesn’t matter… but the higher it is, the worse it is
        1. There is no “good percentage” of Bad-fit customers so don’t ask
      2. What are we looking for?
        1. How many of the customers that churned were Bad-fit (i.e. they churned because the didn’t have Success Potential in the first place)
        2. How many of the customers that churned were Good-fit (this, plus Bad-fit should probably equal 100% or your math is off)
        3. While we can’t know for sure, it is very likely that the Bad-fit customers kept us from focusing on the Good-fit customers and that’s what caused – at least some of – the Good-fit customers to churn
          1. Were they profitable customers?
            1. Note how long they stayed
            2. From the time they signed-up
            3. To the time they canceled or failed to renew
            4. Note how long they needed to stay to break even on Customer Acquisition Cost (CAC)
            5. Did they stay long-enough to become profitable or did we lose money on them
          2. Are they having a compounding negative effect on us?
            1. If and where possible, tie these churned customers to negative reviews on public review sites
            2. Look through won/lost interviews to see if any of these Bad-fit Customers come up as reasons a prospect chose not to go with your company
          3. Do the same for customers that reduced the value of their account
            1. Customer (logo) churn is easy to see / harder to hide
            2. Contraction – customers staying on but paying us less for the privilege – is something that’s easier to miss/hide, but just as, or sometimes more, problematic than full-on customer churn
  3. Do the same thing for customers that Expanded (Upsells, Cross-sells, etc.)
    1. Bad-fit customers tend to not expand their relationship with a vendor, for obvious reasons
    2. If a company’s growth is dependent upon a land-and-expand strategy, and they are signing too many Bad-fit Customers, that strategy is going to fail
  4. Go through your current sales pipeline and tag prospects as bad fit… and then watch their progress through the sales cycle and as a customer 
      1. Are Bad-fit customers closing at the same rate as Good-fit customers?
      2. Are Bad-fit customers taking longer to close?
        1. If it takes longer to close Bad-fit customers (and it usually does because there’s more convincing required on your part and more of a leap of faith on their part) that’s something sales would definitely be interested in
        2. You can do this historically, too…. Look at sales cycle length for Bad-fit customers historically vs. Good-fit customers.
        3. This likely plays into CAC as well; longer sales cycles increase CAC and reduce CAC Efficiency
        4. BONUS: If you want to get Sales leadership buy-in, show how sales cycles are longer for Bad-fit customers; the longer the sales cycle, the fewer sales. Show them the easy way to shorten that cycle and close more deals… you’re their best friend.
  5. Go through your existing customers and tag those that are Bad-fit
    1. When tagging, consider…not using “Bad-fit” or even “BF” … make up something else, like “Process = mapped/unmapped” for fit/Bad-fit
        1. doesn’t matter… but we likely don’t want anyone knowing what we’re doing just yet
    2. Now when a customer churns, doesn’t renew, or fails to expand, we know if that customer was a Bad-fit or not
        1. Can we 100% tie that churn to them being Bad-fit? Yes. Learn why here.
        2. Once we’ve mapped Bad-fit customers, we can say with confidence, this percentage of our customers will likely churn, not renew, or certainly won’t buy more or advocate for us
        3. Using Success Vector along with this tagging, you can start to predict WHEN your customers will churn
        4. Of course, this method will also allow you to easily predict Expansion revenue (or a lack thereof) from your customers, too.
  6. Start tracking time spent with customers… 
    1. Nothing too detailed, just time spent
    2. Be transparent about why you’re doing this with your CSMs so they’ll be onboard.
      1. Nobody likes to be micromanaged so they’ll resist this at first if you don’t explain why you’re doing this
      2. No CSM actually wants to work with Bad-fit customers; they know it’s a waste of everyone’s time so they’ll dig this exercise if you explain it right
    3. Do it for a week and then a month.
      1. Asking for a week at a time helps the medicine go down easier
    4. Look at the time spent with Bad-fit vs. Good-fit customers
      1. Pretty much ANY time spent with Bad-fit customers is time NOT spent with Good-fit customers
      2. If it is skewed too far in favor of Bad-fit, it becomes obvious that it’s taking away from Good-fit
      3. But even if there’s more Good-fit than Bad (which hopefully there is), that’s still time taken away from Good-fit customers to work with Bad-fit
      4. If you can show that you’re spending time with Bad-fit customers that churn out anyway, that’s bad
  7. Create and present a presentation to your Executives
    1. Begin with the roll-up financial impact of Bad-fit customers
    2. Have drill-down reports ready should they need to see proof, including:
      1. Pipeline Analysis Good vs. Bad-fit Customers
      2. Churn (all kinds) Good vs. Bad-fit Customers
      3. Negative Market Sentiment Good vs. Bad-fit Customers
      4. Sales Cycle length / CAC Good vs. Bad-fit Customers
      5. Profitable Percentage Good vs. Bad-fit Customers
      6. Person Hours Invested Good vs. Bad-fit Customers
      7. And whatever other data points you come up with
    3. No, I don’t have a template for you… get to know your audience and understand what you should be presenting to them
      1. For some, a spreadsheet will suffice, for others, a well-designed slide deck – that is still focused on the financial impact – will be required

I hope that helps you. But if that wasn’t enough, here is some….

Further Reading on Bad-fit Customers / Success Potential

About Lincoln Murphy

I invented Customer Success. I focus primarily on Customer Engagement. Learn more about me here.