Making solid, sound decisions in our businesses requires that we a) know what information to look for in our companies, b) how to interpret this information and c) then take decisive action on what we learned. Last time we talked about realistically looking at your profits. This week we’ll look at a second area where an honest assessment can produce big results.
2. Non-Performing Customers.
Contrary to what you may have heard all customers are most definitely not good customers. You may have an “all your eggs in too few baskets” customer. (They represents too large a percentage of your overall sales and that is very scary!) Or a client who simply isn’t profitable—it costs you more money to service them than they pay you to provide the service. (Some of my Frequent Complainers fit in this category!)
Perhaps the most dangerous “non-performing customer”(NPC) is the one who lulls us into thinking they’re a good customer. These customers are like drug dealers and we’re the junkies who depend on them! Here’s what I mean…
One of the toughest calls I ever had to make in business was “firing” a customer like this. He was a three-banger with all three of the above danger signs! This NPC represented more than 20% of my company’s overall sales, the profit we earned on his work was paper thin or non-existent AND he chronically strung out his payments beyond 90 days.
In retrospect I think, “What was so tough about that “firing the client” call? That customer was killing you.” But at the time it felt like I was throwing my whole company under the bus when I walked into this NPC’s office to file “business divorce papers”! After all, I had employees (with cute little families!) who were depending on me to provide them with work!
The problem? I had become addicted to the busy feeling I got from the work this NPC sent us. I had chosen to ignore the hard data that the jobs we did for him were unprofitable. Because of my refusal to make an honest assessment I had ramped up our company to meet his needs and became even more dependent on his work. It was slowly killing me.
Every month I would inject the payments he would reluctantly send us into our company like an addict injects a drug into his veins. This NPC knew his payments were just enough to keep me working for him and not so little that it would give me the courage to leave him. Fortunately, I was able to see this and take action before it put me out of business.
So then- How good are your customers? Do you have an unhealthy dependence on one or more of them? Does any one customer represent 10% or even 20% of your sales? If so, ask yourself, “If this customer fired me tomorrow, how would I survive?” Think about what steps you would take to stop the bleeding. Since you could no longer depend on the sales volume from this customer, you would have to find other customers to replace him. Hmmm… maybe it’s a good idea to do this now rather than later.
How profitable are your customers? Do you job-cost your accounts to know for sure? Having a close relationship with your clients is a double-edged sword. Sure, you want to be close to your customers so you can anticipate their needs and be more valuable to them as a service provider. Yet at the same time please be careful that you keep honestly assessing their value to your future. If this client is truly a unprofitable NPC don’t continue to do business with him or her just because we don’t want to lose their friendship.