Profitable Customer Relationships, is this a reality? Also, is every job or project worth taking on?
I say no, not really…and here’s why.
If you are busy all the time but don’t seem to be making enough money. And, you are working horrendous hours. Then, it could be that you need to take stock of who your customers are. So, ask yourself. Are your relationships with your customers profitable?
Making sure the customers you are working with are the right customers for your business is crucial. Not only to, the profitability of your business but also to the hours you spend working on it.
Case Study: Grading Customers for Profitable Relationships.
Recently, I collaborated with an architect. He provides services in the construction industry. His business seemed to have sufficient revenues, but there was little profit in the business. And, he was not paying himself.
So, we spent some time examining his customer mix. To work out if there were particular customers or types of work that didn’t make any money. Incidentally, I refer to this exercise as grading the customer for profitable elationships. And, typically done as an A.B.C.D. grading.
One issue we found was that there were particular job types, for example, private residential work. Which, just ended up being unprofitable. Another problem was with an individual customer. This particular customer who he had a long relationship with, and on the surface appeared to be one of his profitable customers. Was not! My client helped this particular customer prepare tendering documents for which he did not get paid. But, when his customer won a bid, my client got a good job out of it.
However, the analysis showed that only one in 5 tenders are won. Therefore, that one profitable job did not pay for all the other (freebie) work. So, my client had to show some leadership and be courageous enough to make the call and not undertake any more residential work.
Additionally, to tell the customer that he did the tenders with that, the arrangement was not a profitable customer relationship. Moreover, he would only do their work for a fee in the future.
You see the problem becomes that you have to do an enormous amount of profitable work to make up for the not so lucrative. Also, it is not as simple as thinking that you lost £100 on that job, so you just need to make it up on the next one.
Dunn & Bradstreet have a report stating that if your net profit is 10% you need to do 12.5 times the amount of your loss on a job to make up for the loss. In reality, you can spend the rest of the year making up for it.
So, the simple solution is that you need to stop doing work that doesn’t make you the amount of money you need to make. Grade your customers and job types A B C or D. Create the guideline for what makes up each category. Be a strong enough leader to say NO to D grade clients and a few of the C’s. The A’s and B’s will always play by your rules, be happy to do it, and not ask for favours. The D’s will want to set their standards. And, still, be unhappy. Also, ask for favours all the time.
Therefore, get rid of your D Grade customers now (ideally to your competitors). You will make far more money and reduce the hours you work. (Yes, my client paid himself, made a profit after wages and gave bonuses.)