If you’ve done customer profitability analysis, you’ve probably identified who are your best customers – as well as who are your worst. Those customer who place only small or infrequent orders, are tough to deal with, or fail to pay on time – should you cut them loose? If so, how do you do it?
Before you decide to end a client relationship, consider how expensive or time consuming it will be to make up the lost revenue. Because it is costly to acquire a new customer, first look for ways to boost the profitability of the relationship. Can you raise prices or fees, lower the costs of the goods or services you provide, or reduce customer service? With some creativity, you may be able to find a way to turn things around.
You should also consider the following “soft” values of the customer:
The “lifetime” value: Lifetime value is a view of customer profitability that considers what the customer relationship is worth to your business over its full course. If you’re unsure what that duration might be, it’s still useful to consider how much that customer will bring in, and costs you think you will expend, over the next 3 to 5 years. Because it takes a longer-term view, lifetime value highlights aspects that a simple annual profitability assessment might not.
The strategic value: Value can encompass more than just revenue. Consider the non-monetary assets of each customer. A customer who may not contribute revenue directly to the bottom line might still have value in providing referrals, industry insight, competitive knowledge or strategic partnerships. Or it may be that their logo in your sales materials has “marquee value” with other prospects and business partners. Also examine how important your company is to each customer. Are you the sole source of an essential product or service? Building strong, long-term and mutually beneficial relationships is one of the keys to long-term success.
Reliability and financial stability: Some customers routinely place orders that require minimal effort on your part. Others always ask for multiple versions of proposals, have a special request, need a rush order or require extraordinary involvement to complete a project. As you examine profitability, consider all these aspects. Many times customers demand more because they know you will respond accordingly without charging. So it is important to set expectations about servicing levels from the outset.
The “warm fuzzy” factor: Think about the customers that you most enjoy serving. While this factor may not directly impact the bottom line, it is important to consider the stress that demanding or unreasonable customers can place on you or your team.
Ending the Relationship
Be up front: Some customers realize that they may be difficult to work with, perhaps for reasons that are beyond their control. And many times, they value a healthy supplier relationship as much as you do a healthy customer relationship. As a result, an open conversation may be surprisingly effective at addressing your profitability issues.
Explain the situation. For instance, how additional demands are creating a cost burden that makes it hard to keep the relationship profitable. You may also want to mention that you may not be the best supplier for their particular needs; this admission may even have the boomerang effect of making you appear more desirable as a business partner. Be prepared, though, for the worst case, since you may not be able to come to terms that work for you.
Offer alternatives: If you do determine that breaking up is the right thing to do, explain to your customer why you will no longer be able to serve their needs – and be sure to offer alternative suppliers.
While driving customers to your competitors might sound ill-advised, it can be make business sense. Offering your customer an alternative is a gracious way to wind down the relationship, and helps to keep doors open in the future. As is always true in business, it’s advisable to avoid “burning bridges,” as situations can change over time. A former customer could one day become a great prospect, or one of their employees might be hired by a current customer. Also, if you create good will with alternative suppliers, they might just return the favor sending new customers your way, as well.
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July 23, 2009