Managing Your Customers
Can categorizing your customers into A, B, or C types work for your shop?
One of the most important, but challenging aspects of business is the management of your customers. We can all agree that your customers are indeed the lifeblood of your business, but sometimes we mismanage our customers to the point that they become very challenging to our businesses and, at worst, end up costing us money instead of earning us money.
One of the struggles you probably encounter regularly is the challenge of meeting competing customer demands. How often do you accept a job with agreed-upon delivery dates only to find problems that inevitably compress the production time to the point that you have to make difficult decisions on overtime, delayed, or missed shipments, etc.? If the deadline for one client competes with that of another, how do you choose between the two? Do you, at times, just find yourself deferring to the customer, or the sales rep, that makes the most noise? That’s not the best long-term strategy for managing customer demands.
One idea might be to categorize your customers into A, B, or C types based on sales volume and profits generated by your customer base. Care for your A list clients first and foremost, and prioritize them over B and C clients. Likewise, a B client would take priority over a C client when competing demands arise.
This can be a difficult strategy to implement because it’s difficult to consciously choose to take care of one customer’s needs over another’s. But that certainly beats the alternative, which is to plow forward with production, ignoring the inevitability of missed deadlines and ship dates, and hoping for the best. Frankly, the best way to execute this strategy is to make sure that everyone in the company, particularly your sales team, understands your strategy and how it ultimately serves everyone’s bottom line.
Negotiating prices with your customers is also an important part of your business. While quality and service are often more important to the customer than price, establishing a fair value for your products and services will always be crucial to your on-going customer relationships. How do you do that in today’s competitive marketplace?. By being careful not to charge so much that your customer creates a bid situation in which the lowest price wins every time. Yet, you also need to ensure that the jobs you are producing yield the necessary profits for your business. That’s the trick.
The first step in creating a pricing model is determining which customers are profitable and which may need to be adjusted. We all want to make profits on every customer and every job, but the amount of profit related to a particular client and/or their specific jobs will always vary. An effective pricing model should begin with a targeted gross margin return on an overall basis for the business. By gross margin, I essentially mean after materials, labor, and an allocation for some overhead related to the production costs. Let’s assume that margin target is 50 percent. Your goal is to price as many jobs as possible with this margin in mind.
Realistically, there will be some jobs that allow you to increase your margins above your target and there will be some that don’t allow that much margin. The challenge is to get the higher margin jobs to offset the lower ones as much as possible.
As you might suspect, the size of the client and the size of the job combined with the competitive marketplace will dictate your ability to move pricing up and down. Bigger jobs with smaller margins can create more cash flow than smaller jobs with high margins, so be careful how you manage the pricing. You should also keep in mind the A, B, C prioritization we discussed earlier to make sure you are identifying your “A” clients and ensuring that you are offering them competitive, yet fair pricing. If you’re able to balance this pricing process with your customers, you will continually create profits and positive cash flow to your business.
One of the most difficult decisions concerning your customers may be determining whether or not they’re the right fit for your business. The marketplace is always in an evolving state; both your customers’ and your business models will always be changing. Mostly, these will be compatible changes. But there will be times when you realize that either a particular customer or segment of your business has changed, and you can no longer serve that customer or group.
More than 10 years ago, our business built a building outside of downtown Salt Lake City in the industrial area of town. For several years, we’d been in the heart of downtown, servicing more than 100 professional photographers in that. When we moved our business, we also decided to shut down all film processing, walking away from the customers we’d serviced for years.
Without question, we’ve made some rather stupid business decisions over the years, but this was not one of them. We’d realized that the film processing market was not a sustainable one for our business, and we dropped that segment of our business with no regrets. As you find yourself in similar situations, be bold in making decisions that will benefit your business long-term.
Managing your customers’ (sometimes rather lofty) expectations can sometimes feel like a huge burden to your business and will likely consume a lot of your time. It should be that way. They are, after all, the ones keeping you in business. Still, you must learn to manage your customers. Don’t let them manage you. As you do, you will find yourself make the types of business decisions that will benefit both you and your customers for years to come.