When Was the Last Time You Weeded Your Garden?
No, this is not a blog about gardening. The title is a metaphorical reference to a critically important discipline; that is, the periodic review of your customer base to weed out those customers that are not providing the return on your investment that you desire, deserve, or need. This may seem like a crazy notion when we are working in overdrive to grow sales in a hyper-competitive environment, but odds are you have customers that are costing you money and precious resources.
Let’s begin by thinking about the characteristics of your “best customers”. Most often, we are inclined to think our best customers are our largest customers. After all, those large gross billing customers help to keep our equipment running. But let’s take a closer look. How beneficial are those big customers if they take 120 days, or longer, to pay? What is the impact on your cash flow? And, many large customers overestimate their value by developing a sense of entitlement…like they are an equity partner in your business. As a result, they tend to be very demanding, maybe to the point of abusing your people, processes, and equipment.
I’m not suggesting that all large customers are bad. I’m simply suggesting that how we define “our best customers” needs to be based on a more comprehensive set of criteria. So, let me suggest a few attributes that my help you look differently at the task of valuing your customer base –
- How timely do they pay? Cash flow is more important than profit. Are you measuring the DSO (“Days Sales Outstanding”) for each and every customer?
- How well do they utilize your production capabilities? If you are not familiar with the concept of “value added” you need to do some homework. Do they spend time in each of your profit centers, or do you need to outsource much of the production needs in order to satisfy their expectations?
- Are they committed to partnering with you? I mean in the good way. Are they willing to work strategically with you to develop a long-term, mutually beneficial relationship? Do members of your team enjoy working with them?
- How are they priced? Do you receive enough revenue to cover your costs?
- What is your “market share” with specific customers? Are you a primary supplier?
- The corollary to the above point is a significant watch out. How important is a specific customer to your operation? Do they represent an inappropriate percentage of your total sales? Are you overly leveraged by a specific customer?
Of course, it’s easy to generalize. Every situation may be different. But, my experience suggests that we spend too much time enduring bad customer behavior. We are so leveraged by our sales challenges that we gladly accept bad customers when they are sold (or we do not bother to thoroughly evaluate them before bringing them on-board), and we tolerate a relationship that actually risks our ability to sustain the business. Develop an “ideal customer profile”. Use that profile to evaluate existing customers and prospects. Then, focus your efforts on growing with those customers who best fit the profile. It takes courage and discipline, but it will be well worth it in the end.
As an aside, firing a bad, abusive customer can be one of the most enjoyable and rewarding experiences you may have.
More food for thought…