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|Complete Business Wisdom
|When it Comes to Customers, Be Willing to Drawing the Line
Harvy Simkovits, CMC Published in Boston Business Journal 11/17/00
Small businesses tend to be very customer-service-oriented in order to stay ahead of the bigger competitors in their industry. Usually, owner-managed firms tend to bend over backwards for all their customers, which keeps those customers loyal to them.
However, treating all your customers with the same level of quality and degree of service can hurt profitability. For example, one companys sales and service representatives would spend almost as much time and energy serving $1000/year buyers as $100,000/year buyers. This is great for the buyers, but the company ends up losing money by wasting precious handholding time with the smaller buyers. Multiply that loss by the number of small customers that this company serves and it adds up either to a sizable dent in company profitability, or to lost revenue opportunities in not being able to go after the "bigger fish".
Analyze Your Customers
Heres a simple method for assessing which customers are offering you greatest profit potential. From this analysis you will be able to "draw the line" with less profitable customers, which means strategizing your companys approach with less-lucrative customers so that your company is not drained of its limited resources in serving that clientele.
First, you need to start by categorizing your customers and your companys product and service offerings. One financial planning firm quickly came up with a set of client types and ranked them in order of potential profitability to its firm. Categories were a) small-business owners, b) high net-worth retirees, c) other high net-worth people (who may have inherited wealth), and d) high-income executives. The company figured that it would always pursue small-business owners, since there was great potential for business growth in that category. However, they next considered at what net-worth and income levels would it be not worthwhile for them to serve a client in any of the latter 3 categories. They came up with ranges for these measures and said that in the lowest range they would "draw the line" and not take on any new client, but refer them on to low-end providers.
The beauty of what this firm did was that it never said "no" to any prospective or existing client. However, they created a strategy to keep their most lucrative customers and pass out low-end business, with the clients permission, to a set of strategic partners where there were friendly reciprocal arrangements and who could better serve those clients.
Strategize Your Customers
A build-to-order manufacturing company found itself in a similar dilemma in that it wanted to pursue bigger customers with high value-added products and services. However, they needed to "draw the line" with the smaller "mom and pop" customers where there was much less money to be made. Instead of just cutting off the smaller customers, they decided to use their product discount and delivery schedules as tools by which their smaller customers could self-select as to whether they wanted to do business with this manufacturer. For example, when this manufacturers became filled-up with big orders, they would not allow for any pricing discounts and quick-ship delivery times for smaller orders. This way they never said "no" to their smaller customers when busy. Rather, they said, "Sorry we cant better compete for your order this time, but please try us again on your next order, because we may be better able - in the future - to give you a price and deliver that you would be more satisfied with." This strategy ended up working well for them.
Another manufacturer/distributor also saw that it wasted expensive road-salesmens time on smaller orders that usually came from customers who either walked in off the street or called in an order. They decided to "draw the line" on these customers by having these people served by a lower-cost, in-house service rep. This in-house rep was also trained to qualify customers such that if a "big fish" prospect walked or called in, they would pass that customer onto one of the more experienced road-reps.
From these examples, it should be clear how important it is to categorize the various customers you serve as well as the products and services you offer them. It is also vital to figure out in which categories of customers, products and services you are making a profit and where you may be losing money. Then you need to develop a strategy by which to mine your most lucrative categories, as well as build profitability in the less lucrative ones.
If you cant develop an effective strategy to make money in less profitable customer categories, then you may need to "draw the line" with those customers. One high tech company went as far as to target and serve only their top 60 most profitable customers. They then, nicely but deliberately, turned the rest away. Im not suggesting you cut off your less-profitable customers, but that you develop a clear strategy to best serve and best make profits with the customers you currently have, and those you want to pursue. Otherwise, your customers will be running your business strategy and telling you what to do, rather than you being in charge.