Why You Should Fire Some Customers

Latest posts by Lori Williams (see all)

This week I spoke to a new client who contacted me through the eAdvice service on my website. In her written correspondence she expressed concern about the overall profitability of her company. Of course, those were not the specific words she used in her email. Rather she wrote the words I hear many business owners proclaim, “Although I continue to get new clients I still do not have enough money to support my business yet alone my personal expenses”.

She recognized the issue but was not sure of the best solution. She wondered if she should invest additional money in marketing to increase the amount of customers. She was also considering hiring a lower wage person to take on some of her daily task thinking that would lower the cost.

Often business owners believe the answer may be to simply increase sales. However, if current sales are not yielding enough profit to cover both production and operating expenses then increasing the number of transactions may not increase profitability. Moreover, if the staff is already working at capacity and the company is not yielding profitable returns, hiring admin support may not be the answer either. This is especially true in service based companies where the addition of a customer will require an equal increase in time.

What’s the Correct Answer?

First you need to fully understand the profitability parameters that you must work within. This includes knowing the Gross Profit Margin and the Net Profit Margin. The Gross Profit Margin identifies the profit from sales after subtracting the cost to produce. The Net Profit Margin identifies the remaining profit after overhead has been deducted.

If the Gross Profit Margin is not sufficient to cover overhead then you have three options: increase the selling price, decrease the cost to produce or reduce the overhead expense. Each of these solutions (or any combination) requires further analysis. Specifically, the market may not bear higher prices, production cost could be fixed as well as some of the overhead cost. Nevertheless, you will need to make changes in one or all of the areas.

Assessing Customer Profitability

The next step is to rank customers according to their average Gross Profit Margin. This is defined by calculating the total revenue and subtracting total cost for all sales within a defined time period.

Once the customers are listed by their Gross Profit Margin, the ones that are at or above the Gross Profit Margin are distinguished from those that fall below. For example, based on the company’s financial structure if the Gross Profit Margin target is 45%, all customers below that amount should be reviewed. This analysis can be used to separate those customers that add to the bottom line from those that actually cost the company money.

Armed with this information management can (1) review the customer relationship to determine the reason they are not profitable, such as for discounting, excessive use of customer service, customized orders and/or extra services that are not added to the price (2) set better customer policies that will address the issues identified (3) consider discontinuing service to the least profitable customers (4) use customer profiling to identify new customers similar to those that are profitable.

For a more detailed description of the process including other performance measurements or to learn about eAdvice  visit www.BusinessSimplyPut.com Click on eBooks or Videos for information specific to this topic.

Previous Article

Closing a Deal - The Three Essential Sale Requirements

Next Article
business on main street

How To Grow Your Business Using Social Media

Related Posts
sales team strategy
Read More

The Best Investments to Improve Your Sales Team Strategy

Creating and maintaining a thriving business depends on the success of sales performance. Essentially, the effectiveness of your sales team at generating revenue is directly related to the success of your business. Keeping your sales team motivated and helping them maximize their performance can be challenging, but with the right tools and investments, you can...
Read More

Small Businesses That Own Their MarTech Can Edge Out the Competition

Adjustments to data protection regulations and Big Tech's revamping of how applications and third-party brokers acquire data sets have upended the world of user data management and remarketing. Big Tech, GDPR, privacy browsers and different privacy compliance standards are removing the user data of billions of users from the control of third-party marketing providers that...
brand awareness
Read More

5 Ways Technology Can Improve Brand Awareness

Brand awareness is more important than ever. Without it, customers can’t differentiate between your business and the competition. As a result, whether they shop in-store or online, they may not remember your company after a purchase, even if they like the products you sell. Brand awareness is especially important for startups, which need to quickly...