Generally the customer is always right - I'm in a service industry after all (architectural design / construction management). That said I've had two (and only two) instances where the client was such an insufferable pain in the ass I didn't take additional projects from them. They got dumped on our competition. Win-win. We didn't either (1) lose money like we might have or lose the opportunity to put our time / effort / energy into a more profitable client or project and (2) the competition was busy spinning their wheels for these guys and losing out on the better opportunities.
I hate turning away work but every once in a great while it makes sense. The trick is to do it without burning bridges - sometimes the same client can come back after a change in management a few years later and be a much more lucrative opportunity. Also referrals count for a lot. But it's still (sometimes, rarely) okay to tell them "I'm sorry but we're pretty busy with other clien commitments right now and we wouldn't want to compromise our reputation or our professionalism by providing you with anything less than our absolute best service and we simply don't have the resources to provide that right now" (translation: you're a pain in the ass, cheap client who is impossible to collect from and you're not worth my time - come back when you figure out you're the problem and not everyone else").
