Q: How do you balance getting the right customers and maximizing profit?
Roslyn McKenna, brand manager
SH Data Centers
A: The well-known rule of thumb is that 80 percent or more of the company's profits come from the top 20 percent of its customers, while the lower 20 percent of clients often result in negative profits.
Reasons for unprofitable clients may be the amount of support time they require or the project doesn't really fit your business model. When looking at your unprofitable clients, you may want to analyze what it is about the client that is the reason they are not a good fit for your company. Which size and type of projects best fit your business model, and at what price levels?
The dilemma is: What do you do about it?
First, rank your clients by profitability. Next, determine if it is the project or the client that is causing this relationship to be unprofitable. One accounting technique to identify the true costs of the project and its support is activity-based costing, where you track all costs of doing business with a client. By doing this analysis you will be able to clearly identify the 10-20 percent of your clients that are unprofitable and why they are unprofitable.
Now that you have identified that a client is not profitable, you need to take steps to "fire the customer" so that you can focus on more profitable clients. Do this carefully, as the client may come back to you in the future with a project that fits your business very well, so you don't want to burn your bridges.
In terminating your client, make sure you politely explain the situation, focus on their needs, be professional and help them transition their business to another firm or competitor that may better fit their needs. Firing a customer can be an emotional challenge.
It helps to have a preplanned script when talking to the client you plan to release. You need to clearly and professionally explain the reason for terminating them. Don't get into personal issues about the relationship, as this is much more subjective. You want the client to go away feeling good about the relationship and feeling that another firm may increase their own overall satisfaction. This is a win-win for both you and your client.
Kathy Jenson is an adjunct professor of marketing at the University of St. Thomas Opus College of Business.