The best solution to a problem lies in uncovering what the root cause of the problem really is. So often, this is the case when an entrepreneur is struggling with profitability in their business.
Over the past few posts, we have discussed the concepts of how a minimum order policy and Pareto’s Principle applied to the customer/client base can be very powerful. These concepts all contribute to help you increase the value of your business.
Understanding the value of your customers, & which ones offer the greatest profit is the key to increasing the value of your business.
How is This Done?
By understanding clearly which customers/clients offer you the greatest profit, you automatically focus a bright light on the remaining customers/clients who do not. Those are the ones that actually cost you more than what they offer you in doing business with them. This is the worst form of Leaving Money on the Table and it is very important that you do what is necessary to remedy the situation.
Does This Sound Familiar?
Over the years, you have had a number of long-time, customers who for many reasons always need something extra. Not sometimes, all the time.
They are the customers who call you late Friday afternoon and need a shipment to be sent FEDEX because blah, blah, blah… Of course your day shift already went home. It is 3:30 p.m. and the FEDEX pickup driver is on your loading dock.
How about the customer who complains when you have been forced by your suppliers to raise your prices by 3% for the first time in three years? They are the customer who orders once a year and pays their bill 45 days late.
I Am Afraid I Know the Answer
Unfortunately, we all know the likes of the customers described above. I swear there is a training camp out there someplace for these folks!
It is very important to understand that you own the business and it is up to you to decide with whom you will, or will not, do business.
I just love this quote from The Leap by Rick Smith:
Above all else, remember this: Whatever traps we may feel stuck in are largely of our own making. What we have built, we can also undo.
What we can dream, we can achieve.
I can apply this to many facets of my life. And no better than the decision you face every day when you agree to do business with someone… or not!
To really understand your company’s profitability—or in other words—where you make money and where you are losing money, look closely at the customers/clients who fall below the line in the 80/20 Pareto’s Principle exercise. Do some or many of these customers/clients drive you crazy? What are their common characteristics? Do they all buy the same things or services from you? Do they all come from the same place or have similar demographics? Look closely.
In our next post, we will explore how to remedy this situation so you will not find yourself trapped by doing business with customers/clients who force you to leave money on the table.
Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.
Latest posts by Holly Magister, CPA, CFP
- How to Pay Yourself as a Business Owner - November 6, 2019
- How to Overcome Customer Concentration Objection When Selling a Business - May 22, 2019
- Understanding the Business Buyer Types When Selling Your Business - April 12, 2019