Do you know which of your customers are profitable for you and which are not? Yeah, if you look for them, you’ll probably find a few (hopefully only a few) that really aren’t contributing anything to your bottom line. So how do you identify them? And once you identify them, what can you do about them? For more on this, please read below.
At least once a year, it’s a good idea to audit your customer list looking for customers who are only marginally profitable or even unprofitable. Ideally, you would have a system in place to continuously monitor profitability by customer. If you know where your Gross Profit Margin needs to be on a companywide basis (as you should), then you’re simply looking for those customers whose individual Gross Profit falls below the companywide level. If necessary to do this, ask your accounting firm for help. It will be worth the expense. Once you know which customers are unprofitable, you can either take steps to improve their profitability, or if that’s not possible, politely suggest that they would be better off being someone else’s customer.
As part of this exercise, you should also look for customers who are just a bad fit for you. They are the 20% of your customers who cause you 80% of your customer service headaches. These are the ones who, no matter how hard you try, you just can’t seem to satisfy. They can demand disproportionate amounts of attention, and they can cause stress and anxiety in your organization (read unhappy employees) . . . all things hard to quantify in dollars and cents, but very real cost factors nonetheless. Even if they are profitable customers, you have look at it from a cost/benefit point of view. Are they really worth the stress they cause and would we be better off redirecting the time we invest in them to a more productive activity?”
It may sound like I’m being very cavalier about how we treat our customers. I’m not. Customers are pretty tough to come by these days, as we all know. I’m not suggesting that we send a customer packing the instant we see that customer’s profitability start to fall . . . there may be all sorts of valid reasons to hold onto that customer. But I am suggesting that we be aware of it, ask some questions about why it’s happening, and make a conscious, informed decision. Likewise, I’m not suggesting we should cut a customer loose the first time we have a customer service issue. But when some customers stand out as having chronic customer service issues, we have to look at whether or not the customer’s expectations and ours are in sync, and if not, we have to question if we’re really good long-term business partners.
If you’ve never done a customer audit as I’ve described here, you should. You almost certainly have customers who are eroding your profitability and consuming more than their share of your resources. If you don’t know how to find them or where to look, call me. We should talk.