Re-evaluate your customers – are they profitable?
It is normally seeing their email address appear that brings the feeling of dread as I open Outlook. One of those customers that many of us have to endure, remain professional with, keep on side and bend to. The customer that never seems to be really happy, never seems to be on the same page and never sees the value that you provide for them. Why do we bother?
The Pareto Principle states that 80% of consequences come from 20% of the causes, so in business you often find that 80% of your profit comes from 20% of your customers or 80% of your time is often spent dealing with 20% of your customers. If you extract this further it is quite often 20% of your customers who cause 80% of the headaches! Now of course this is a rough approximation but the observation is the same, which customers are causing stress and which are making you profit.
When you first start out, you and your team will put up with almost anything in order to get sales, get money into the bank account and get the business moving, this can be exhilarating, exciting and stressful. As your business matures and you have a customer base you can start to see, feel and observe who the awkward customers are, but let’s try and quantify this a bit more.
"You can’t manage what you don’t measure." – Peter Drucker
This age-old adage that if you don’t measure certain variables you cannot reliably work out where the profit is, is really important. In our company we measure how much time each member of the team spends on each customer and what they are doing for them. We also apportion how much each customer uses the systems, resources and goods we pay for and then we work out the profitability of that customer. We then have a monthly meeting where we discuss the behaviour of the customer, their principal contact, payment terms and then as a management team we score them and decide if they are worth the bother. I cannot tell you how positive and rewarding this is.
Another trite but useful cliché coming up…
"Nature abhors a vacuum." – Francois Rabelais
Once you’ve decided that a customer fails to meet your criteria, what do you do now?
This will depend on your business model and how strong your sales pipeline is. Let’s assume that you have no new customers waiting. Now you can either continue servicing this customer who is costing you money, or set them free, take the hit on your sales income but not lose time or money helping them. You now have a gap you need to fill, you now have slightly more time and less operational grief from that awkward, unprofitable customer so you can really get on with it. More time, less grief and more impetus to get that new customer. This could be as simple as being able to meet new people at the golf club, networking meetings, spending more time on your social media, finding new connections and contacts or even just having more time to think, create efficiencies and new ideas.
What are the worries about this course of action? The loss of revenue – Of course it depends on the size of customer and your business, but if this customer is causing 80% of your headaches and is not contributing to your bottom line then it is an unsustainable, one-sided relationship. The potential marketing fallout from stopping – not delivering what a customer expects is one thing but having a decent conversation to explain the imbalance and why you cannot continue may often have surprising, beneficial consequences in rebalancing the relationship between your company and your customer.
If you have a much higher volume of sales then you’ll need to capture more data about your customers so that you can quantify what characteristics or product types cause you to spend the most time for the lowest profit and then score this accordingly.
Time is the most valuable thing we have in our business. Use it to maximum effect.