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Sorting the wheat from the chaff


You can see more about my company at www.osamcquillan.ie or if you want to make an appointment to see me you can phone +353 1 283 4123.

 

We have spoken about new customers, old customers, new products and services, and existing products and services.  Now lets talk about a subject which is taboo for many businesspeople, particularly small, struggling and unprofitable businesses.

 

It is an accepted fact that 80% of the final effect springs from 20% of causes.  An Italian economist Vilfredo Pareto, observed in 1906 that 80% of the land in Italy was owned by 20% of the population; he developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas.  The effect is known as the Pareto Principal.  How does this help us?

 

Some customers are not worth servicing.  They don’t want to pay market rates, they are slow in paying their bills, they may be operating weak or inefficient businesses themselves.

 

Whatever the reason, these customers that are not worth servicing contribute 20% of the profits but consume 80% of the resources of the business.  Therefore we should increase our profit on them or get rid of them.

 

How each business goes about this is different, but suffice to say that these customers are undoubtedly holding your business back because they comprise 80% of late payers, 80% of complaints, 80% of phone calls to your business, they take longer to sell to and therefore consume more selling time.  I list at the end of this section some tactics to manage them out of your business, more as a set of suggestions than as hard and fast rules.  Feel free to use any of them or a combination of them to manage your business more profitably.

 

How do you find these customers that are not worth servicing?  You could ask staff, because often they are closer to the customers than you and see them every day.  You can analyse the symptoms of the troublesome customer – slow payers, low margin products, high level of returns, low value of orders – and identify them that way, but is is important to root out these time-wasters.  

 

You can see more about my company at www.OSAMCQuillan.ie or if you want to make an appointment to see me you can phone +353 1 283 4123.

 

You will be able to grade your customers on the basis of a scorecard, assessing how profitable sales are to them, how much trouble they are to serve, how long it takes them to pay and so forth.  Whatever you choose, the scorecard you assess customers on has to be logical and consistent, in other words you should get the same score for the same customer if you graded them again next week.  You also have to apply the scorecard to all customers, regardless of size or how long they have been with you.

 

Your scorecard should include some measure of overall profitability for your business from the customer.  You can do this by figuring out the mix of the products sold and the profit on each of the products.  The level of profit you make from each customer will be a large percentage of the overall score account.  email me at .@osullivanassociates.ie for a sample of a Customer Scorecard, but you will probably have to design your own to suit your own needs.

 

Think of it this way – you are sending some of your biggest problems to the competition, and what’s the harm in that?

 

There is one measure that deals with how difficult it is to deal with a customer, and to answer it properly you may well have to analyse how you spend your own day.  Do that for a month and you can see who is taking up your time.  Score them appropriately on the scorecard, and then decide on whether you want to keep those customers.

 

You don’t realise the positive energy you will release in you and your staff when you get these customers to ‘shape up or ship out’.

 

There is more on this later on in the book on how to identify unprofitable customers in the next part of this book which deals with Margins.  You will also be helped in how to identify customers that take up your time currently by keeping track of your time – see sections 43 to 47.

 

Tactics to move on customers you don’t want any more:

1.  Increase prices – just for them.

2.  Charge a service charge for unprofitable accounts to keep the account open each year.

3.  Have a minimum order level, ensuring that there is more profit per delivery to you.

4.  Impose credit terms such as time limits on when a customer can pay a balance – this may take some time, and you may have to face writing off some of the balances due from under-performing customers.

5.  Impose credit limits – in other words decide how much credit a particular customer is going to get, and ensure that they pay you off before getting any more credit from you.

6.  Ask for customers to pay using their credit cards if you give credit to customers – that way you get the money more or less immediately and then the credit card company can do the collecting.

7.  Get rid of smaller items – if you get rid of smaller items so that customers have to buy items with a higher minimum value thereby automatically increasing the average spend.

8.  Get rid of low margin items, which will have the effect of increasing your overall profit because you will no longer sell those items.

 

Staff will also have to carry out this assessment – how do they spend their time, which customer is the most profitable to service.  Sometimes they will know the answer to the question of ‘Who should we get rid of’, but often their opinion ( and maybe your own ) is coloured by emotions.  The most popular customer is often the least profitable.

 

The reason customers are popular is often because they spend time developing a relationship with everyone they meet, and they may be the beneficiary of informal discounts because of it.  On top of that they may spend their time striking up friendships, rather than doing their own job and running their own business profitability, thereby putting pressure on their suppliers, one of who is you.

 

There is a whole area of study called Activity Based Costing, but here I want you to focus on where your time and the time of your staff is spent.  At the very least I want you to get across to your staff that their time is precious and had to paid for somehow.  If they are customer-facing it is vital that they focus their time and effort on getting more sales for the business.

 

This touches on a sensitive subject for a lot is business owners – ”what should we tell the children?” – how much do the staff need to know about the business?  My own opinion is that you need to tell the staff how the business is doing, so that their own progress can be measured.  If you run a larger operation, many of the staff will be able to do a back-of-the-envelope calculation of how much sales the business is generating.  So I come down on the side of telling the staff a lot about the business.

 

If you don’t agree, then you need to tell them about some of the vital signs of the business, also know as Key Performance Indicators, or KPIs for short.  Professional managers will construct a ‘dashboard’ of KPIs to measure their business.

 

You could mix it up by using some fun indicators – one business owner I know lets the staff send in their happiness index as oftem as they like and this is part of the reporting.  They report on how happy they are as often as they like, scoring marks out of a hundred, and the average appears on everyone’s desktop as the Happiness Index.

 

The simplest KPIs are financial – sales, expenses, customer balances.  You may want to have these and also have another few, depending on where you are taking the business right now.  For example, average sales per year per customer, number of customers and a thousand and one other measures.

 

KPIs need to be aligned with the rest of the plan for the business.  For example if you want to increase profits, you could do that in a number of ways.  You could make more sales, you could increase the margin on those sales, or you could reduce expenses.  If you follow the logic of what I am saying in the previous paragraphs, you may come to the conclusion that to serve less customers at a higher level of sales would automatically produce extra profits.  All your costs remain the same – it takes the same time to deal with a large customer as a small customer in a lot of cases.

 

There many be ways you can help the customer sell more of your products.  If you are an electrical wholesaler selling to retail customers, like hardware shops, you can offer training to your customers staff to boost sales.  You can offer special price promotions for a larger volume of sales, or help the retailers display your product better with display stands.

 

One of our early customers in the accountancy practise objected to higher fees because it took us longer to complete his accounts and tax returns.  His logic was that he couldn’t charge customers more in his hardware shop just because they took longer to sell to.  I suggested to him that he should get rid of troublesome customers who take ages to sell to, but he was having none of it.  His logic is that if you are talking your are selling, and with the benefit of hindsight and having watched him in action in his shop, I tend to believe him.  But we still had to charge high fees because his job took so long.

 

You can see more about my company at www.osamcquillan.ie or if you want to make an appointment to see me you can phone +353 1 283 4123.