Is it time to part ways with some of your customers?
Gasp! You and your team have worked too hard to build these relationships and land the deals. You’ve spent endless hours architecting proposals and coordinating projects. You’ve endured the grueling process of becoming a new vendor for your customer and you are proud of having a seat at your customers’ proverbial table. Can you stomach the thought of ending your relationship after investing so much sweat equity? Well, it may not need ever come to that.
Let’s back up for a moment. This piece is intended to get you thinking about customer profitability. If you’re selling products, you may have your cost of goods equation engrained in your memory next to your address and family’s birthdays. But do you know your cost of sales for the services you deliver…or further…your cost to serve? Even further, do you know your cost of sales by each customer you serve? Before you decide whether or not to hunt a customer (don’t laugh, there will come a day when you can actually select the customers who you choose to pursue) are you able to project insights from your existing customers to predict just how profitable that new customer would be?
Knowing these insights begin with being able to conduct an accurate profitability analysis. You’re likely well informed of the revenue each of your customers brings. But knowing your customer’s expenses are equally as important. To evaluate your cost to serve, your expense analysis should not only include the direct expenses you incur when serving a customer such as consulting time, maintenance costs, etc., but should also include the indirect expenses you incur. These are expenses that may not be attributed to a customer.
“What are examples of these indirect costs?” you ask; indirect costs could include a range of different expenses such as the cost to acquire a customer including the travel expenses you’ve incurred to conduct pre-sales visits or the event you sponsored to find this customer at a trade show. The cost to serve a customer could also include the costs you’ve incurred to win the deal or maintain satisfaction such as costs to develop a new prototype or product configuration to meet that customer’s specific needs. Maybe it includes the costs you incur to maintain customer-specific inventory levels or make shipment exceptions such as expedited deliveries.
Tracking these expenses and attributing them to your customers will enable you to produce an accurate picture of the true profitability of each of your customers, or even your customer groups. With these insights, you’ll be able to rank your customers by profitability and identify the roster of loss-makers, or those with negative profit margins. Better yet, you’ll know who your best customers are and can determine how you could better serve them…profitably.
Look, we all know that the decision to take on a new customer or nurture existing ones involves more than just profitability. There are all sorts of other reasons for why you should keep a customer who is on your loss-maker roster: a customer may be positioned as a ‘best in class’ in an industry and can refer you to other customers. Or, maybe the customer helps you break into a new region or territory. Maybe the customer is an advisor on the new products or services you take to market. Maybe that customer isn’t profitable now, but you predict their lifetime value to be superior. Or maybe they’ve just been a customer for as long as your company has had furniture and abandoning them would lead to repercussions you could not even imagine. All of that reasons-and more-are perfectly valid for keeping a loss-maker customer.
However, none of these reasons should stop you from knowing the impact these customers have not only to your top line but to your bottom line. You may find that once you understand the cost to serve a customer, you’ll be in a better position to drive efficiencies in your service delivery model. For example, if you find that you’re spending more on a customer’s service or maintenance calls than you are on other comparative customers then perhaps you can restructure your maintenance contract or transition them to more of a self-service model. Or, you may find that certain customers require more time onboarding and instead of offering them custom solutions or services you find a way to standardize your offerings according to collective needs.
Identifying the opportunities to implement these improvements can quickly move a customer off of your loss-maker roster. This way the thought of actually firing a customer can remain just that – a thought. For more insights on what you can learn from a customer cost to serve analysis read 5 ways to implement your cost to serve insights.