Q: An important customer asked us to make some new parts for them that are difficult for us. But their business was important to us, so we took it on. Now it’s a huge headache, and we don’t even make money on it. Any ideas?
Metal Fabricator, Blaine
A: We’re conditioned as business owners to grow the business at any cost. The expression I often hear is, “If you’re not growing, you’re dying.” And I agree, sort of. It’s hard to turn down new revenue opportunities. But before you go for it, understand where you make your money.
Think of the Pareto Principle, or the 80/20 rule. Vilfredo Pareto was an Italian sociologist, and he observed that 80 percent of the wealth was held by 20 percent of the people — referring to them as “the vital few vs. the trivial many.”
We find that many businesses follow similar patterns. For example, often 80 percent of profit comes from 20 percent of the customers. Similarly, 80 percent of resources can be consumed by 20 percent of the customers — and it’s often not the same 20 percent.
Try to differentiate “good customers” from “bad customers.” Not in a personal way, but strictly by the numbers. Good customers ask you to do things you do well, are willing to pay for it, provide a profit without consuming inordinate resources, and challenge you to improve consistent with your strategy. Bad customers are the opposite. They ask you to do things that you don’t do well, draw attention away from your good customers and chosen strategies, and will remain dissatisfied no matter what you do.
At times you need to swallow some bad business for strategic or personal reasons. But barring that, what can you do to turn a bad customer into a good customer? First, have a frank conversation with them. There are no great options here. Either you increase your pricing to cover costs and make a profit, or you discontinue the unprofitable business. If they accept the new pricing, at least your “headache” is not a financial burden. If they don’t, mutually negotiate a smooth transition out. Either way, they probably won’t be thrilled by your decision.
Nobody enjoys these conversations, but most (good) customers will empathize even if they opt out.
Mike Ryan is the director of the Small Business Development Center at the University of St. Thomas Opus College of Business.