Are all Your Customers Created Equal?
“The customer is always right.”
“We have to take care of the customer no matter what.”
“The customer focused business is a successful business.”
We’ve all heard or probably said those things.
Have you ever had a customer that you were always happy to see and were happy to see you? Your transactions always went well, were profitable and they never complained about price, paid on time or early and generally were a pleasure to work with. You probably found yourself looking for ways to make them even happier, right? This was why you started this business, right?
Then there’s the customer that complains about everything, never happy, never satisfied, complains about the price, demands discounts, pays late, and is overly demanding. Everything is a crisis and is never his fault. Your stomach tightens and you can feel the perspiration on your forehead the moment you see his number on the caller ID. It shouldn’t be this hard. It would be great if you didn’t have to deal with this customer but sales are sales and you just have to put up with it.
Wouldn’t it be great if all customers were like our best customer? How great would it be to only have to deal with the great customers? Well, maybe it’s time to fire some of those pain-in-the-neck customers and, believe me, this will be one of the hardest things you’ll ever do. We as business owners only think about that next customer, that next sale. If we take a deeper look, we may see that all customers are not created equally and, more importantly, some customers are not worth having.
We’ve all heard of the Pareto Principle, that 80% of our revenue usually comes from 20% of our customers. What if there was a way to use the Pareto Principle to really concentrate on your best customers, meet their needs efficiently and have plenty of time to think of ways to make their experience with you better. What if you could forget about all those other customers that are constantly complaining and demanding this or that taking up far too much of your time. There is – fire those customers!
So how do you know which are the best customers to get rid of?
Try these steps to identify customers you may want to fire:
1. Copy your customer list down the first column on an Excel spreadsheet.
2. Across the top columns, list all the attributes of a great customer: profit generator, pays on time or early, orders regularly, etc.
3. In each attribute, rate the customer from 1 – 5 with 1 being worst and 5 being best. After the last column sum the row to get that customer’s score. You can then use the sort function to sort your list from best to worst by using the sum column.
Now that you’ve objectively identified your problem customers, you have to come up with a plan. Here are some strategies to think about:
Fix what you can fix. Review each problem customer and think about all the things that cause you pain. Are there ways that this customer can be saved? What can be done to eliminate the problems? Maybe there are solutions that can be used to save the relationship.
Be honest. You don’t want your customer bad mouthing you to other potential customers so you need to be very sensitive as you explain your decision. Tell the customer that you have worked hard to service their needs but feel they would be a better fit elsewhere. Refer them to a competitor and make the introduction for them. Follow up to make sure that the transition went well.
Don’t look back. You’ll miss the lost revenue at first but the extra time will allow you to focus on maximizing sales from your remaining customers. The most likely outcome will be a drop in sales but usually your gross profit will hold steady.
Look in the mirror. If you seem to continually attract the customer from hell, perhaps the problem is you. Maybe your marketing is not targeting your ideal customer. If you did the customer analysis you should know who your ideal customer is now. Test different marketing tactics to attract only that customer.
Several years ago, the business I owned at that time was struggling and finding cash just to operate was a daily problem. Needless to say, I wasn’t sleeping very well. One day, my CPA called and said the company’s tax return was ready and wanted me to stop by and go over it. When I arrived at his office, he had a big smile on his face as he extended his arm to shake my hand.
“Fantastic job,” he said, “you’ve really turned this company around and I’m impressed how profitable it now is.”
Me, profitable? I had just been wondering how I was going to find enough cash to make payroll on Friday. I decided to come clean with him.
“The truth is, I probably don’t deserve your praise because I don’t have enough cash to make payroll on Friday and I’m really not sure I can keep the doors open for much longer,” I said looking down in shame. “How can I be profitable when I don’t have any money? Where did it all go?”
He was quiet for a few moments. Slowly, he picked up the tax return and slipped it into a big white envelope with his company logo emblazoned on it and placed it on the desk in front of me.
“Do you know the difference between cash and profit?” he asked quietly.
“What do you mean? Aren’t they the same?”
“Not at all,” he said. “Let me explain. Profit is only an accounting term used to define the result of the accounting equation: Sales minus cost of sales and expenses equal profit. It’s very simple. We sell something, pay our bills and whatever is leftover we call profit.”
“Cash, however, is not generated by some equation. Cash is generated only through the receipt of cash in some manner, either through sales, borrowing or taking in investment dollars. When we pay our expenses, whether they are for equipment, materials, labor or taxes, we must use cash to do so. For example, when your company gets a new contract, you usually have to buy about $20,000 worth of equipment to place at the new customer’s location before you get the first new sales dollar. And, you need to pay those suppliers off in about 60 days, correct? And, you won’t bring in enough profit in those 60 days to pay that bill, correct?” He paused so I could think about this.
“Now, on your profit and loss statement, it will show that you had both an increase in sales and an increase in profit. You as the business owner spend most of your time trying to grow your business by increasing customers and sales. The problem, and one that most business owners fail to realize, is that increased sales cost money.”
“Most businesses need new assets to support an increase in sales and these new assets need to be paid for usually before the new sales can generate sufficient profit to cover the increased cost. Sometimes it is new equipment, new staff or a big order of materials. Sales growth has to be planned and, fortunately, there are tools that you can use to make sure you can afford to grow and take advantage of new opportunities.”
“Let me ask you this,” he asked, “how do you decide what bills to pay and when?” he asked.
“Well, lately I go online and check the bank balance and will pay whoever is calling and threatening the most,” I said being very honest.
“That’s what I thought,” he chuckled. “Cash is the most precious resource that any business possesses. You have to plan carefully who you pay this week as well as the rest of the month, next three months and the year. The only way to do this is to forecast your cash inflows and outflows on a weekly and plan 13 weeks forward. It can be hard at first, but if you do this habitually, you will be able to predict when you will be short on cash and hopefully find ways around the shortfall.”
“You mentioned ‘tools’ that I should be using to plan my cash inflows and outflows. What are they?” I asked.
He pulled out a single piece of paper from the top drawer of his desk and handed it to me. It was a copy of a spreadsheet with 14 columns and was full of numbers.
“This is my firm’s cash forecast and we use it every week. I’ll send you a blank template that you can customize for your company,” he replied. “Try it for a couple of weeks and if you get stuck, give me a call and I’ll help,” he said as he stood up.
I knew my time was up and shaking his hand, I thanked him again and again.
This is a true story and learning how to forecast my cash inflows and outflows allowed me to grow my business methodically and kept me sane. If this is your story too, send me an email and I will be happy to send you a template that you can use to forecast your cash. If you need help to get started, call our office. Once I started using the template, it wasn’t long before I was sleeping much better.
Director Louisville SBDC