Not every customer is worth keeping. Knowing which ones aren’t starts with knowing what each one actually earns you.
Every business owner is in it to make money. To win. To grow. You know selling, and bringing in new customers, is what gets money in your door. But do you know how much you are making from each customer? If you are like most business owners, the answer is likely no. You might know how much money you are making in total, but not from each customer or from each job performed. Understanding customer profitability is the key to customer management, pricing, and time allocation. Would you continue serving an unprofitable customer?
This article focuses on two types of customers you should consider firing to improve your business performance: unprofitable customers and customers who represent a high opportunity cost.
Unprofitable customers
In simple terms, there are two types of unprofitable customers: those with prices that are too low, and those with costs to serve that are too high.
In the first group, you may understand what it costs to serve these customers, but your prices are simply too low for them. Maybe you are afraid to lose their business, or you have been charging them the same price for a long time, even though your own costs have been increasing over the years.
Understanding the current price benchmark for your products and services is key to determining whether you are leaving money on the table with these customers. In some cases, it simply takes an honest conversation with a loyal customer to turn an unprofitable relationship into a profitable one.
In the second group, the opposite might happen. You understand the market price of your product or service, but you don’t know the true cost of serving these customers. Serving them might be more expensive than you think because they ask for job changes, or they take a long time to answer your requests or to pay you, taking valuable employee time. The unpredictability of these customers is what erodes profitability.
Customers that are a high opportunity cost
Once you have a calculation of profitability at the customer and job level, it is relatively easy to identify the customers and jobs that are unprofitable. For most business owners, it isn’t difficult to reach the conclusion that “I’d rather make money than lose money,” and fire the unprofitable customers. But there is another group you should also consider firing, and it is harder to spot: customers with a high opportunity cost. These are customers who are barely profitable and who prevent you from serving other, more profitable customers.
Imagine your loyal customer with whom you barely make money. This customer takes your time, your employees’ time, your materials, and your precious schedule. If the customer is not profitable enough, or is not in the right product line, you could be using that same time to serve other customers and make more profit for your business.
Spotting this type of customer requires an understanding of how profitable you want to be. It means engaging in profit engineering: establishing goals for your business and your life, then finding the customers who will help you achieve them, instead of finding customers and then seeing whether they allow you to be profitable. In one option you remain in the driver’s seat. In the other, you are reacting to what happens around you.
These recommendations are not a one-size-fits-all answer, and you must be careful when firing customers. There are three things to watch out for.
Try to fix the customer before firing them. Sometimes it doesn’t take more than a quick call to update the price for a loyal customer, or to establish a change order for an indecisive customer who always changes scope.
Ask for what you need. If you don’t say anything, customers are not going to come and ask to be profitable for you. You have to ask.
Consider whether it is strategic to keep an unprofitable customer. This is true for customers who anchor other, more profitable jobs, or whose lifetime value (the profit you will get from them over the course of your relationship) is so great that it makes sense to be unprofitable at the beginning.
When you decide to fire a customer, you open up space in your time and schedule to serve other, more profitable customers. That requires the right set of business development rules and practices to identify this type of customer. The result will be a better mix of profitable customers in your portfolio, generating better financial results for you and your company with the same effort as before.
An outside perspective can help you navigate these decisions about customer management. What customers should I keep? What customers should I fire? How do I know a customer or job is profitable? And is the job profitable enough? You have worked so hard for your business. Now you only need to stay in the driver’s seat, deciding which customers you want along with you on the journey to success.
