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As business owners, we’ll take all the business we can get, right? But are there times when we need to ask for more compared to the cost of serving our customer? No business owner ever wants to alienate a customer — it’s a harbinger for bad PR and distractions for you and your team. But what about “that” customer whose cost to serve is way off the charts??
We were beside ourselves recently when one of our clients (and yes, we’re telling this story with their permission 😊) told us they had actually fired certain customers who weren’t profitable enough. When asked about it, the owner responded, “[w]ell, I just couldn’t afford to spend 80% of my time [to only make] a 5% margin … when I’m making a lot more [from other accounts].” They certainly have a point — no one wants to play the volume game when it comes to building a business that lasts, but it got us thinking: is there a point when you give up on a customer, or is there a better way that keeps the customer and preserves the margin?
Our proposal to this client was pretty straight-forward: raise your prices or, if you’re an hour-billed service provider, look more closely at the time you are billing for. In short, your prices are set with margin included so if your margin is matching up with your price points, then the price points need to be recalculated or you’re giving something away.
For product businesses, this frequently comes in the form of returns, samples, items lost in transit, you name it. We all love free stuff and we never want to get stuck with stuff we don’t like, let alone something that doesn’t work. We’ll focus on the stuff that doesn’t work or gets lost in another post, so for now we’ll talk about the stuff people don’t want, like etc.
The most important aspect of returns is the “why.” Having return options that are limited to it didn’t fit, I didn’t like it, I no longer want it, et cetera, might not be enough. Encourage (but think carefully about requiring) your customers to add context in the form of comments. For longterm and trusted customers, consider their returns as a way to get product feedback while also strengthening the relationship — a two-fer!
Then analyze the data. What are your customers saying? Are there particular customer types that are saying something more often than others? (For example, are college students more likely to return your widget versus individuals and business customers? Or do most of your returns come from a particular area? You don’t need to get too inventive here, just think outside the box.) This process will lead you to the ‘next question’ and drilling down further to get to the root cause (or the “bottom why,” as we call it).
When it comes to samples and giveaways, that’s more of a personal decision. Is the customer loyal or are you trying to buy it? Has the customer committed to going you feedback about your samples (and return it/them if they’re not satisfied!) or is it a gift? How are samples paid for? (Do they come out of your sales team’s commissions or are they a “house” expense?) For sales teams, does everyone use a uniform process or is there a small number who ‘give away the store’? That’s not necessarily a bad thing, but it should be a cue to dig deeper and see if it’s worth the time and expense. It might be a winning sales strategy — after all, who doesn’t like people who give them free stuff?!
For service providers (us included), we never want to be thought of in the same way as lawyers who bill for every second they can (no offense intended, counselors). For us, it means billing in 15-minute increments and rounding down whenever possible. This begs the question of how much does all that rounding down cost? For us, it’s thousands of dollars’ worth of unbilled hours a year. But, after running the numbers and looking at how we go to market, we made the strategic decision to go that route. Our mindset is that if those minutes are the difference between us surviving and not, then we’re doing a whole lot more that is wrong than ‘giving away’ a few minutes of time throughout the day.
The other side of that is our pricing. Like everyone else, ours is calculated with margin factored in. Like our clients, it’s how we continue to grow and find new ways of adding value and being on the cutting edge of the new ideas and innovations that will help our customers succeed. It’s how we’re able to attract and retain the best talent. That requires setting honest, realistic expectations up front when we start a new project — low-balling is never, ever an option (if this is your business’ strategy, then you need to talk to us so we can help you not need to reply on this strategy!). We always over-estimate the time required— typically 20-30% —and we’re incredibly transparent about it from the start. [We also call out what those contingency situations might look like so everyone is on the same page (e.g. we’re assuming __ is true, and if it’s not it could affect progress, etc.). This allows our clients to see what we’re thinking and potentially get ahead of problems.] We can’t stress how important communication is to building customer relationships — it’s the difference between being a partner and becoming just another vendor.
But, getting back to pricing and estimates. When we come in under on our estimates, that helps us demonstrate that we work with our clients’ best interests at the heart of everything we do. And if we use all of the time that was supposed to include contingency for the just-in-case, our clients understand why so they are able to trust that we’re being the best stewards possible of their dollars because we’ve had the conversations up front and all along the way.
‘But what about the time when we and a client go into a project having no idea how long it will take or what it will cost‘ you ask? Well, for us, these are mostly large — usually transformational — projects, but you might be in a different situation. Regardless, we tell our clients that this is one of the moments where trust is absolutely critical. Your customers have to be able to trust that you are there to accomplish a goal and get out, with the highest quality work and lowest possible cost that you can.
But it all goes back to measurement. The old saying of “what gets measured gets managed” (and you can replace “managed” with “improved,” as well) is so true. And don’t forget the little stuff: how much expendable material (office supplies, etc.) do you use up in a typical project? We’ll have a post in the next several weeks about how to measure things like that, but it’s something to start looking at now. For us, it’s factored in as a whole, versus by project, mainly because it would be too challenging (and for our clients, too nickel-and-dime-y) to try and keep up with. Plus, you need office supplies and the like regardless, so there’s no sense in “stepping over quarters to get to pennies,” as the saying goes.
Bottom line: it’s a measurement mindset, with a relationship focus. The measurements will help you manage the relationship, and you may have to get creative to balance the customer relationship needs with the business profitability needs.
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