Revenue is the life blood of business. I absolutely abhor the thought of giving up any revenue or suggesting that any business should do so. But sometimes, it is simply the right thing to do. Businesses are quick to deal with problem employees, but employees are a vital part of the value equation just like customers. Shouldn’t we deal with problem customers similarly? Problem customers, just like problem employees, harm our relationships with good customers.
The profitability equation is simply out of whack with some customer relationships. Some customers just cost too much to serve. See if any of these sound familiar…
· The customer that starts your relationship with their procurement department negotiating all the value added components out of the relationship—then the customer accuses you of bringing no value. In order to deliver the value that you are accustomed to providing your customers, you add more resources, do more work, all under the contract and price negotiated originally. Profitability suffers.
· The customer that negotiates your contract to the bare minimum level of acceptability, effectively commoditizing your business, yet continues to ask for more and more and more. Then, when you present or suggest a billing for the additional work, they accuse you of “nickel and diming” them. You don’t bill them, profitability suffers.
· The customer that is so difficult to work with that none of your talented people wants to work them. Someone is assigned, tries to power through the combat duty and eventually you lose a good employee that you have invested in training and developing. Your profitability suffers.
· The customer that continually pushes your people to cross ethical or moral boundaries. Your people can respond several ways to this dilemma (hopefully acquiescing is the way they refuse to respond!), none of which is generally healthy for the customer relationship (although taking the high road is always the best answer, but this is a more in depth topic for another time). Regardless, profitability suffers.
In all of these cases, your company might be better off without these customers. But companies often feel they are not in a position to do without and, therefore, they live with the drain on their business.
In a study done by Robert S. Kaplan of The Balanced Scorecard fame, he found companies have a few unprofitable customers that could be costing as much as 20% of the profits of the company. The following chart was published in that study.
Remember, the objective is to serve our customers in a way that helps them be more successful. Some of these problem customers prevent us from helping them and our other customers that aren't problems. That simply cannot be a customer-focused way of doing business.
So, should we fire these customers? Maybe, but as a last resort. There are many other things we should do first. That’s the topic for next time.
Do you have any scenarios of customers that drain profitability?