Sleeping Partner Number 5: Go away from my door
Customers do not come cheaply. In a competitive market-place, suppliers have to fight to prove themselves to potential customers, and then, once having established a trading relationship with them, have to continually be aware of the possibility of losing them to competitors. Everyone seems to be so strongly focused on new business prospects that sometimes we don’t actively manage the existing customer base well enough. I finished the last Sleeping Partner by alluding to the prospect of deliberately losing customers. Could this make sense? Why would you want to do it? How do you recognise when you need to do it? And how would you go about it?
First, let’s get my view on this clear: yes, it can make sense, particularly if you are primarily a product supplier rather than a service supplier. But don’t start cutting a swathe through your customer list just yet. We’ve all heard the common complaint inside a company “If only we could rid of all these customers, we could get this business running properly.” I’m not quite proposing that as a frontline strategy. Not quite.
All businesses measure the success of their sales and marketing effort and this is quite simply the value of sales. This will be recorded, analysed, and understood (well, possibly) at all levels of scale. From the whole business total sales figure, down through divisional sales, regional sales, right down to the individual customer account, I’ll bet you there isn’t a company that couldn’t produce these data in a twinkling of a financial controller’s eye. Most businesses also try to establish an understanding of the cost of sales. This isn’t just keeping an eye on the sales manager’s expenses – good business indicator though it undoubtedly is. The total cost of the sales force, the cost of marketing, advertising, merchandising, staffing the internal sales office, all of these issues may be considered at some point. However all of this is surrounded by what are often considered ‘overheads’. These are the so-called common expenses and costs without which the business couldn’t function at all. Whether you’ve got one customer or hundreds, there are certain basic essentials which will always exist and are assumed to be evenly smeared across the balance sheet. They just get deducted in one lump and that’s it.
My discussion point this time is based around the idea of trying to work out in greater detail exactly where these costs are incurred. It is crazy to assume that the cost of doing business with every customer is equal. Go and ask the financial controller how much it costs to do business with a customer and I guarantee you’ll get an answer that starts “Well, on average, . . . ” Yeah, on average. If you’re a salesman reading this, (quiet at the back there. Yes, some of the brighter ones can read, and we believe that within a few years they may be able to think as well) try that tack when you submit your next monthly report, “Well, on average, my accounts all bought the same.” Of course they did, that’s what an average is. We wouldn’t accept that thinking for money coming in to the company, so why should we accept it for the money draining out of the company? Usually when someone finds out that the cost of being in business is approaching parity with the income derived from it, the immediate reaction is “we must cut costs”. But because the costs are only understood at the highest level, as a grand total, then the savings are targeted in the same way. All departments have to cut down equally: pencils, staplers, paper, all these essentials without which no employee’s home is properly equipped for school work, get put on allocation. Everyone gets miserable, morale drops, and secretaries are heard muttering in the corridors “He said he would leave his wife for me, but it turned out he only wanted a new ring binder.” If only we could find a way of really apportioning costs, especially the hidden insidious ones, according to each customer we would be in a much better position to understand the true value or cost of a customer to us.
Now, earlier on I suggested this applied particularly to product suppliers. This is even more so if the products are complex or technology dependant. These companies will be quite aware of the market value of their products and will probably have previously focused most of their attention on the actual product sale itself. However over the past few years there has been a swing towards recognition that products themselves can not always be relied on as differentiators. Two suppliers of pneumostatic reciprocating flange brackets are probably competing now as much on the service and support side, as on the basic product. (By the way, as a complete aside, here’s a good tip when you’re out of your depth in a business meeting. If somebody mentions a phrase that you’ve never heard of and don’t understand, like, say, ‘pneumostatic reciprocating flange brackets’, don’t let it get to you. As soon as you can, get a reference in to it yourself, but use only the initials. “Ah, the PRFBs”, you say, “Jim, what’s your understanding of the situation?” As soon as you use the initials, everybody else thinks “Wow, he’s such an expert on this he doesn’t even bother to say it any more” This never fails – you have my absolute guarantee on this.) The trouble is these two companies are so steeped in the traditions of manufacturing products that they may be blind to the hidden costs of providing all this extra service and support.
How often does a customer call your technical support hotline? What type of product is he asking for help on? If it’s a low margin product, you may find that even a few minutes of a skilled engineer’s time has eroded any profit you made on the original sale. You’re dealing with this customer at a loss. How often does he re-schedule his deliveries? Every time a new set of shipping documents has to be printed, every time the warehouse has to fit in an emergency shipment, these all cost money. Does he pay his invoices promptly or does he expect extended terms and still miss payment dates? Yet we do it in the name of greater customer care and service. Try examining your business from these aspects. You may well find that the value of product sales is actually undermined in some customers by the amount of effort and resource consumed in maintaining their business. Could those resources be better applied elsewhere if you stopped dealing with the customer? Or at the very least starting to charge a corresponding premium to him for these services he sucks in. The drive for closer relationships with customers is sometimes misguided. Those companies providing only services are more likely to realise the value and cost of every minute they spend meeting a customer’s requirements and will price their services accordingly. The product suppliers caught up in the maelstrom of competition on the service front may not be so conscious of how to assess these costs or sell their services profitably.
If all else fails getting rid of the customer may be the only option. And furthermore, if he’s been so much of a nuisance to you that you’ve finally been driven to this last desperate measure, just think how much he’s going to slow down your competitor when they pick up the business in your place!