How to know when having a client is unprofitable

Exploring how customers become 'profit vampires' and how to manage your client roster to ensure they don't suck your business dry.

Consultant Chris Merrington explores how customers can become ‘profit vampires’ and how to manage your client roster to ensure they don’t suck the life out of your business.

Can you measure the profitability of each customer or client within your business? The trap that is easy to fall into is to focus on their spend with us, their turnover. This can deceive us into assuming they are profitable. So how does it happen that a client is unprofitable for us?

Perhaps historically we set our prices too low. This may have been because we lacked confidence to charge a premium price or the right price (whatever that means!) Aggressive prices from competitors can cause us to drop our prices or our desperation to win a new client in the mistaken brief that our price is the sole determinant in the decision process for our clients.

Another mistake I commonly see is being seduced by a ‘big-name’ customer which will look good on our client list, adding credibility to our offering. How much are you actually prepared to pay for a ‘trophy client’? Let me re-phrase that; how much are you actually prepared to lose to have that ‘trophy client’?

Another common problem I see is that the work changes from the original requirements and we don’t adjust our price to take this into account, perhaps through fear of rocking the boat or seeing it as too small to bother about. Inflation appears to have been relatively low over the past few years however, the cumulative effect of inflation over the past 5 years is bigger than you might think, 18 per cent. That means that if 5 years ago you charged a client £1000, everything else being equal, we should now be charging £1180 minimum.

One strategy I occasionally see is believing that the situation will miraculously improve tomorrow. It will not improve unless you take action. Einstein said that the first sign of madness is doing the same thing and expecting a different result. Hoping it will improve is not a realistic approach. Hope is not a strategy. So how should we slay our vampires?

  1. Firstly define and identify your profit vampire clients and the reasons why. Then develop an individual plan to improve the situation with each client. If you can’t improve the situation then look to replace that customer with a more lucrative one. Is that easy, no, but it beats doing nothing.
  2. Take a long hard look at the rest of your client base to understand what strategies are required to maintain, improve and amend each client position. Those clients you call ‘investment clients’ can sometimes be ones we lose money on and will never provide a decent return on our ‘investment’. It is so easy to delude ourselves.
  3. Take more time to think through your pricing strategy. How can you optimise your profitability by pricing better? Price is one of the most critical areas to affect profitability. When I work through with clients how best they can price more strategically, we often identify ten or more different techniques they need to consider.
  4. Recognise that your price today is not just a price for today. It will have long term implications especially with that specific client. If you get your price wrong today, it will have a major influence on the price you can charge that same client next year and the year after.
  5. Ensure the team appreciate the importance of profitability and the implications of what impacts it, and are not just focused on topline revenue. Is your team incentivised on gross revenue or profitability?
  6. Be brave! Making the right decisions in business can be all about being brave and having the confidence to make courageous decisions.

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