Turning Down the Wrong Customer: An Entrepreneurial Decision

Why is it so hard to turn down a customer?

For most owners, every customer is a success. They were won against competitors, often with a lot of effort. Turning down or letting go of a customer therefore feels wrong, almost like a betrayal of one's own work. Added to this is a fear that is justified especially in small businesses: what if the revenue is missing? What if the customer speaks badly of us?

By turning down customers I mean two things: not accepting a request because the customer does not fit, and deliberately ending or scaling back an existing business relationship. Research calls the second case customer divestment. That raises one question: When is it entrepreneurially right to turn down a customer, and how can it be done without harming the business?

To answer it, I first describe why companies part ways with customers and present a step model from research. Then I weigh two attitudes and show what studies say about how those affected react. At the end there is a proposal for how an owner can prepare the decision.

Why companies part ways with customers

Mittal, Sarkees, and Murshed (2008) shed light on this topic in one of the few broad studies on it. They analyzed press reports and company announcements, interviewed 38 executives from 32 companies in various industries, including manufacturing and services, in 2005 and 2006, and surveyed 236 customers. 90 percent of the executives had seriously considered parting ways with customers, and 85 percent had already done so. None wanted to talk about it publicly.

The authors found four recurring reasons. The first is the obvious one: a customer is persistently unprofitable. The second concerns employees. Customers who are constantly disrespectful or make excessive demands lower productivity and morale, and in the worst case good people leave. The third is lack of capacity, for example when new regulations sharply increase the effort per customer. The fourth is a change in strategy, when a business concentrates on certain customers or services.

For a small business, the second reason is often the most important and the least noticed. A customer who wears down the team costs more than their invoices show. They tie up the owner's attention, spoil the mood, and crowd out customers with whom the work is enjoyable. An everyday analogy: a guest who spends a lot every evening but treats the staff condescendingly and disturbs other guests is not a good guest for a restaurant, even if they bring a lot of revenue.

A customer you keep only because you fear the gap occupies the place of a customer you will never win.

The thinking model: five steps before termination

Mittal and colleagues warn against simply sorting customers by profit and letting the unprofitable ones go. They develop a step model that explicitly makes termination the last resort. Each step checks whether the relationship can still be changed so that both sides win.

1. Reassess

   Review the relationship beyond profit: have the customer's needs changed, or has your own business changed? Sometimes it turns out that a customer was misjudged, for example because they do not fully know the offering.

2. Educate

   Many high-maintenance customers do not know how to use the service properly. An introduction, a guide, or a fixed contact procedure reduces the effort. According to the authors, this is often easier in business-to-business relationships than with consumers.

3. Renegotiate

   Talk openly about the value of the relationship for both sides. This can mean charging for extra services in future, introducing minimum quantities, or adjusting the scope. The authors stress: negotiate, do not dictate.

4. Migrate

   If no agreement is reached, the relationship can be reshaped: a leaner standard offering, a different ordering channel, a more junior contact person. Some companies also refer customers to a partner who can serve them better.

5. Terminate

   Only when none of these steps works is the relationship ended, directly, personally, and with notice. Around 90 percent of the business-to-business executives interviewed communicated a termination personally and began months before the end of a contract.

The model fits a finding described in the article ABC customer analysis. According to Homburg, Droll, and Totzek (2008), clear prioritization increases average customer profitability without measurably worsening relationships with less important customers. The path therefore usually leads not through termination but through clear standards for each customer. Termination remains for cases in which even standards do not help.

Two attitudes: every customer counts or the wrong customer costs

On the question of whether to turn down customers, there are two attitudes, both widespread in small businesses.

The first attitude says: every customer counts. A small business cannot afford to be choosy. Revenue covers fixed costs, even if the individual order yields little. And whoever is a difficult customer today can become a good one tomorrow or recommend a good one. Mittal and colleagues partly agree with this attitude. They report on a physician who had dropped two unprofitable patient segments and afterward could no longer fill her schedule. Her staff sat idle, and in the end she bought another practice to restore utilization.

The second attitude says: the wrong customer costs more than they bring. They take up time that is missing for better customers, burden the team, and pull the business in a direction it does not want to go. Whoever takes their positioning seriously must also be able to say no. The article sharpening your positioning describes why a business that is there for everyone is special to no one.

My assessment: both attitudes are right, but at different times. Under under-utilization, every order with a positive contribution margin contributes to fixed costs. Under full utilization, capacity becomes the bottleneck, and then what counts is which customer uses the scarce space best. How the contribution margin per order supports the decision is shown in contribution margin per order. So the question is not whether customers may be turned down, but when.

What studies say about how those affected react

Whoever parts ways with a customer mainly fears anger and a bad reputation. This concern is justified, as several studies show, but its extent depends heavily on how the separation is handled.

The figures on consumers are revealing, even though they do not come from business-to-business relationships. 80 percent of the dropped consumers were angry, frustrated, or embarrassed, 70 percent had received no advance notice, and about half of those who were notified were informed only by mail. Most would have preferred a personal conversation. Customers also paid close attention to the reasons: those who believed they had been dropped because of changed market conditions were less angry than those who had the impression it was only about more profit.

Recent experiments confirm this. Béal, Lécuyer, Bayart, and colleagues (2025) examined what happens when a company stops individual services for unprofitable customers but continues the relationship. The probability that these customers also terminated their other contracts rose 2.14-fold, and they spoke badly about the company more often. Customers experienced the step as rejection. A combination of compensation, explanation, and help in finding an alternative reduced anger most.

The effect on remaining customers can also be limited. In an online study with 773 customers, most reacted to the abandonment of unprofitable customers with feelings or thoughts, less often with a change in their own behavior. Negative consequences could be offset by better core service quality (Haenlein and Kaplan 2010).

How an owner prepares the decision

From the model and the findings, an approach can be derived that suits small businesses. It does not start with termination but with criteria that are fixed beforehand.

• I wrote down the criteria before deciding about any individual customer.
• I checked the steps before termination: reassess, educate, renegotiate, migrate.
• I calculated whether the freed-up capacity can be filled with better orders.
• I communicate the decision personally, with reasons and sufficient notice.
• I offer help in finding a suitable provider.
• I tell the team why the decision was made.

With new requests, saying no is easier because no relationship exists yet. Clear criteria help here, as described in the article saying no to orders, along with a profile of the customers the business is looking for, as explained in defining target customers. If a large part of revenue depends on a difficult customer, the situation is more delicate. How to reduce this dependency step by step is shown in concentration risk.

Conclusion: when is it right to turn down a customer?

We began by asking
it is entrepreneurially right to turn down a customer and how to do it without harming the business. The answer has two parts. Turning down is right when a customer persistently costs more than they bring, in money, time, or the team's energy, and when this cannot be changed by education, negotiation, or a different offering. Under under-utilization the threshold is higher than under full utilization, because freed-up capacity must first be filled again.

How the separation is handled determines its damage. Studies consistently show that anger and bad word of mouth arise mainly where customers are dropped without notice, without explanation, and without help. A personal message with an understandable reason and sufficient notice limits the damage considerably.

Turning down a customer is not an insult to the customer or a failure of the business. It is a decision about whom the business wants to serve, and whoever does not make it lets their most difficult customers make it for them.