If you’ve been in business a while, you probably already know that the customers you have when you start out aren’t necessarily the right customers as you grow. And while there’s absolutely something to be said for the value of relationships, it’s also important to understand the actual return your customers bring to the table.
Not all customers are created equal. Certain accounts might not be the right ones for you at this stage in your business. To stay competitive, you have to know how profitable your customers are, how to serve them more efficiently and when to change the terms of your relationship.
Do you know which customers are delivering the highest profits for your business? How do you decide who your best accounts are? It’s possible that the customer who orders the most is actually costing you money.
Ways high-demanding customers may be draining your profits:
- High-support sales process (customers that need the most handholding and attention before they buy)
- Inefficient order practices (e.g., multiple orders per week or day instead of larger, efficient orders)
- Return rate
- Change order rate
- Pricing concessions
- Special requests
To analyze customer profitability for our clients, Wipfli looks at recent and historical customer transactions. We work with them to capture the true cost of delivery, throughout the customer lifecycle. This helps us identify their ideal customer segments, margin and growth potential.
As part of this customer analysis, we find helpful insight into customer margin and lifetime value. With that information, our clients can make decisions about short-term remedies and long-term strategies for managing profit.
How to manage unprofitable customers
So what, exactly, can you do once you’ve identified an unprofitable client? How might you shift your business to make an existing customer more worthwhile — without walking away entirely? Here are just some of the ways to increase profitability on a customer-by-customer basis:
- Targeted price increases
- Adjusting sales incentives, such as discounts or rebates
- Adjusting sales team commissions
- Influencing the customer to change their buying or service habits
- Shifting your service terms
Of course, you always have the option to abandon unprofitable customers. This frees up time to focus on customers with a lower cost-of-service. Customer profitability analysis can help you determine which customers you want to retain and where you want to grow your business.
While certain customers are profitable, they might be causing you more stress than they’re worth.
Customers who are demanding, unresponsive or chronically dissatisfied are a drain on your business. You and your employees are spending excess energy to sustain these difficult relationships.
You don’t want to lose a good employee over a bad customer. You may be able to ask an employee to tolerate short-term toxicity for the sake of a larger goal, but there’s only so much bad behavior anyone can tolerate.
Stand up for your people and be willing to address customer conflict. Losing a valued employee — or letting negative energy spread across company culture — can be more costly than losing a customer account.
Honor your own energy and motivation, too. If you groan every time you see a certain customer name pop up on your cell phone, it’s time to rethink the relationship. It’s a balancing act, but anything you can do to proactively avoid burnout will protect the long-term sustainability of your business.
Finally, a few words about how some profitable customers could hurt your business value in the long-term.
Perhaps you have a few customers who make up a large percentage of your sales. From one perspective, these are win-win relationships. The customer gets reliable service and you get a constant source of work, no sales effort required.
What you might not be thinking about, though, is how customer concentration issues affect the value of your business. If you plan to sell in the foreseeable future, diversifying your customer base is one of the most important things you can do to raise the sale price (and increase the chance your company will sell at all).
Over-dependence on one customer makes the business vulnerable to downturns or unexpected changes in the customer’s business. Buyers see a company with high customer concentration as a risky investment choice.
The takeaway: For high-profitable, high-concentration customers, balance today’s margins against future business value.
How Wipfli can help
What do you know about your customers, and how can you mine that information? Who are your troublesome customers? Who’s highly profitable and who is dragging down your profit margin?
Find out how customer analytics can provide fresh insight into your business. We’ll help you use your existing data, or access hidden information, so you can make better decisions about who you do business with and how you work.
Talk to your Wipfli relationship manager or contact us
to identify your most profitable customers today.