Stop—What If…It’s the Customers?
While growing up, one of us worked in an old-fashioned ironmongers’ store. It was a lot easier to keep the shelves stocked without customers; it was easier to keep the floors clean without customers and, at the end of the day, adding up the money in the tills was foreshortened without customers.
QED, customers are the root of all evil.
No, they really are. Look at most small business failures. They typically fail because they run out of money. Why? Because their customers haven’t paid them. Start-ups fail through lack of customers, but bigger companies fail because of them. There is an old adage that “any customer is a good customer”—but that’s baloney! It might have been true at the ironmongers that another bod through the door could be sold another handful of nails, weighed out and put into a brown paper bag (we did tell you it was old fashioned), and that additional sale would generate both margin and more importantly cash flow ahead of paying wages on Fridays, but it doesn’t work today unless all your business is for cash.
And, thinking about it, even then, the customers who got the biggest discounts—I mean the only ones who got any discounts—were the trade customers—and guess what? They had credit accounts! Now we’re betting that even if you claim to be a cash business, you will still have some people who don’t pay you at the time of delivery with rectangular sheets of numerically inscribed pieces of rectangular paper issued by a government (i.e., money, if you are not one for “cryptic” clues). Or perhaps in this technological era, proffer you a piece of plastic capable of being processed at an electron level, into a value transfer to your business bank account.
Customers Take Credit from You
Our guess is most of your customers/clients/patients, or whatever is the correct terminology in your business line, take time to pay as you have intentionally or otherwise granted them credit terms. More that, although you’ve had the odd bad debt, you haven’t insured your debtors against default—probably because you are as cynical as we are about the insurance game. For those that don’t know, you pay insurance premiums for years but when you do finally have grounds for a claim, the insurer wriggles and wriggles, trying to find ways to not pay you out. Therefore, to our minds, why bother in the first place—we think it sensible to keep insurance cover confined to covering those potential catastrophes which would destroy you financially if they occurred and those insurances you are obliged to have, by law. But this decision must be yours; you don’t have to agree with us on this, or indeed anything.
Like us, you probably didn’t go to a credit reference company when you first acquired the customer on the grounds that any data they have will be based on history rather than what’s happening now. Likewise, any supplier references the customer might have given you at the time would have been from a couple of their tame suppliers who only ever said nice things about the customer.
Pardon? Surprised! Yes, we are, as you did use a credit reference agency in the beginning. But are you getting regular (or even annual) credit reference updates for the 20 percent of your customers who doubtless provide more than 80 percent of your revenues and, significantly, are 80 percent of your debtors?
Helpfully, the dear old 80/20 rule is often extremely close to the mark with all things to do with customers. Try it. Do in fact 80 percent of your revenues stem from just 20 percent of the customers?
Look the other way too. Does 80 percent of your grief/cost/headache stem from 20 percent of your customers and, for the double jeopardy prize, how much of the first 20 percent generating your revenues overlap with a second 20 percent listing of those who give you the most hassle? It might surprise you to see how little overlap there is.
There are several corporations around the world though mainly in the United States and frequently in financial services, who historically would routinely sack the bottom performing 10 percent of their staff. So why don’t you mutate this strategy and get rid of your 20 percent most troublesome customers and get 80 percent of your life back?
Doubling Your Margin?
That’s not very scientific. Nor actually is revenue generated a good basis for decision making. The crux of the value of any customer to you is the margin you make from each—the difference between the selling price and the costs of providing whatever you do for the customer including a sensible apportionment of staff time and overhead—the time that wouldn’t be used if that customer’s activity dropped to zero.
Margin will factor in the discounts you give away, the freebies you throw in to support the customer (co-marketing, promotional, or whatever this extra spend coaxed from you by your customer is labeled by both sides in the transaction), and not forgetting after-sales service cost. It is only the margin derived from each customer that will pay your costs and hopefully help you make a profit. And even then, the margin can’t pay for any of those things unless the money is in your bank account, so perhaps in calculating the margin (do it for say a year—a good time base) you should also deduct a sum equal to the average increase year-on-year of the amount they owe you at any one time. This latter item is the margin tied up in your debtors and therefore not available to the business.
Now, assuming you can do this, ask yourself proper searching questions about any customer on your list that comes out with negative margin. A searching question is of the form: Why should I continue with them? Rather than: What’s the next entry in the bumper book of excuses that I can use to justify retaining them? If it was going to be the hairy old chestnut of: if I didn’t have them, my competitor would, then we’d say let your competitors have these loss leaders.
Hopefully, there are no loss leaders. Now look from best to worst at the rest. How far down the list do you have to go to capture 80 percent of the total margin? Our guess will be 20 percent of the way down the list. So if one-fifth of the customers drive most of your margin, why were we further up the page looking to shed only 20 percent of our customers? Let’s do simple math on losing 80 percent of your customers. Losing 80 percent of all the customers really would give you more space to go find some new ones—even if you’re not ready for such a big step right off the bat.
With the extra time we have created (dropping 80 percent of customers), it could be possible now for you to go out and secure a few more customers with the profile, that is, volume, margin, and ability to pay, that you want. Even if you simply acquire a new 80 percent with your old customer profile, then 20 percent of 80 percent, that is, 16 percent of them, will be in the same league as your previous top 20 percent. Now if we do the math: 20 percent (old) plus 16 percent (new) is, dear friends, a virtual doubling of your business margin.
Mathematical mumbo jumbo you say? Yes, it would be if you tried to gain new clients before dropping the burdensome clients. By now you know the premise of this section of the book, right? Stop doing certain things to free up time, resources, mind-space to then grow, if you want to. Let’s try this. First, fire these 20 percent of low-margin clients. During that process, you might instead be able to renegotiate, increasing your sales price substantially, thereby improving your margin and make you want to retain them. Then, use that spare capacity in your sales time and freed up mind space from those gone, for new customers and voila!
OK, perhaps you don’t do the firing wholesale, if you feel timid. Fire them at a pace that fills you with joy and see your margins improve.
Apply the same rules each year and you’ll find you’re increasing the average value—to you—of each of your customers. Remember no customer has any automatic right to buy from you, so you don’t have to be charitable, or in some cases, put up with some of the nonsense that you do.
Pause: Did you make notes of things in the Action This Today section in the back of this book? If not, please take this opportunity to review the prior pages to identify again any thoughts and ideas you want to follow up on.