Those of you familiar with the Pareto Principle will be well aware of the notion that 80% of your profit often comes from 20% of your customers. In a similar way it is often the case that 20% of your customers create 80% of the headaches in your business.
If that doesn’t immediately resonate with you, take a minute to think about the customers who give you most grief. Almost all businesses can name a few. Now ask yourself ‘are these my most profitable clients’? Intuitively you might expect your most profitable clients to be the hardest to service but this is rarely the case. The opposite is more often true.
This post explains why the Pareto Principle is a helpful framework for assessing your customer base, why certain clients prove such hard work, why you should act on this information and how to do it.
Examine your client base critically
There are lots of reasons to regularly review your client base. Here are just a few:
- It defines who you are. For many businesses, the client list is part of your marketing and part of your identity. In a very practical way, you are also shaped by the customers who you serve.
- If you do not make proactive decisions you will make reactive decisions. If you do not take control of your client base then it will take control of you.
- While it can feel counter-intuitive to get rid of clients, especially if you could do with more business in general, you should remember that every client you service has an opportunity cost. The time you spend servicing that client is time you can’t spend pursuing other opportunities.
Why are some clients such hard work?
As you grow as a business you are often left with clients that you took on a few years ago but now would not choose. Very small organisations can often have unrealistic expectations and may not yet have learned the value of spending money with trusted partners.
Patterns of behaviour can also play a big role. These are quickly developed within the client-supplier relationship and it can be difficult to adjust these once established. If you have got into a habit of servicing awkward clients in a particular way this can reinforce the behaviour and even lead to a vicious cycle of ever greater demands.
What should you do about it?
Growing a business is all about active learning. You need to distinguish things that work from things that don’t work then take action to nurture the former and weed out the latter. Choosing products that sell well over those that don’t seems intuitive but, because it is involves relationships, we often don’t apply the same logic to customers.
You need to make some bold decisions and get rid of under-performing customers!
Of course, you may have thoughtful reservations about doing this. You may worry for your reputation or feel some kind of moral duty to do right by your customers, especially if they were an early customer of your business. However, if these things are bothering you consider the following:
- Your reputation, as a small business, is probably not as good as you think it is. Unless you operate in a very small marketplace, the chance of being seriously tarnished by the odd slightly disgruntled customer is small (this is not to say you should not bother trying to manage the exit well!).
- Your under-performing clients are not sustainable. They are a financial drag on your business and as such it is very unlikely that you are serving them well. They may well be better off elsewhere, either finding a more appropriate supplier or learning the hard way that they have been getting a sweet deal.
- Your under-performing clients are taking an unfair share of your attention and your other clients are the people who suffer. Have you considered your moral obligation to your other clients?
How to sack a customer
OK, so you have mustered up the resolve to get rid of your worst clients. Now you need to figure out how to do it. There are broadly three options:
- Just sack them. This should probably be the last resort but is sometimes the appropriate course of action. I have done this when I have known that the issue is not just profitability or patterns of behaviour but rather that the client is a really bad fit for the business. In these cases, be diplomatically honest: explain to the client that you believe it will be in their best interests to explore other suppliers. Perhaps even make some recommendations.
- Raise prices specifically for that client. How comfortable you are with this will depend upon your business model. If you already have differentiated pricing it can work well – you can simply increase prices to the point where either the client starts to become a leading earner for your business or chooses to look elsewhere. This is much less confrontational than option 1 and also offers a chance to redeem the relationship.
- Raise prices across the board. If you have a unified pricing structure across all clients it can introduce unwanted complexity to increase prices for only one or two clients. If you are transparent with your pricing this is even harder. In these cases, examine your pricing structure and explore ways to adapt this structure to penalise bothersome clients and reward those that really appreciate your work.
Leaving clients behind is never straightforward but when I have got up the courage to do it I have never yet regretted it. Maybe it’s time you give it a try?
Please let me know your thoughts or experiences in the comments below. And if you found this post useful why not read about how I save hours by checking my email only ONCE per day.