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Should you ‘fire’ some of your customers?

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in Small Business Tax

Many small businesses believe that they need every customer they can get. And for some, that may be true. But, in most cases, you may be better off telling certain high-maintenance clients and customers to take their business elsewhere.

Our advice: Apply the PIN (pain in the neck) test to identify customers who are actually damaging your bottom line. Sometimes, the PIN factor outweighs the customer’s potential benefits—a fact that small companies often realize too late, after it’s cost them.

Example: A sign-making company scrutinized its client base and realized that it was spending too much time catering to too many customers who fit its PIN profile (i.e., they demanded to see 10 proofs of each sign, changed orders at the last minute and paid up slowly).

The sign company’s customer audit revealed that construction companies and advertising agencies were its most profitable clients.

The lesson: Focus more on your profitable customers. Recognize your profit-draining clients, and weed them out. Here are three questions to help you identify and handle a PIN customer:

1. Is the business worth your time? If the amount of new business won’t merit the cost to service the client, you’ll lose out. Example: If it takes your company 36 hours to set up the computer system that a client needs to use your services, but the client is only being billed for two hours of use a month, you’re losing money, even on an annualized basis.

2. Would a rate adjustment make them more profitable? Consider altering your rates for certain customers. Move them up to the point where it becomes profitable, instead of turning them away outright if you feel that they have potential. Think about requiring deposits for large or complex jobs.

3. Should you establish a referral program with other companies? That way, you can earn finder’s fees or referral bonuses for customers you’ve discarded or receive reciprocal referrals of new business for your firm.

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