As we begin a new year, you might be drafting a list of resolutions to kick your business up to the next level. Here’s one place to start boosting your profits: weeding out unprofitable clients and cultivating a more lucrative customer base.
When you’re new in business, sometimes any potential revenue can sound rewarding. The idea of discarding the less appealing customers might sound petty and pointless. But the reality is that you spend energy and money to attract and retain customers – and inevitably, some of them could be costing your business more in resources than they give back. By withdrawing your efforts from problem customers, you free up time and budget resources to woo more profitable clients.
Step 1: Categorize your customers
Your first job is to figure out who’s paying off and who isn’t. If you work in a field where you manage only a handful of clients at a time, your accounting books should help provide a quick answer to that question. Take into consideration your clients’ personalities as well. Who demands a lot of hand-holding and phone calls for even minor jobs? Who provides steady business and always pays their invoices on time?
If your business involves many customers, such as retail or hospitality, you will need to group them into categories. A café owner could divide his clientele into college students and professionals, the afternoon crowd and the night crowd, or by location. Look at the variables in your customer base and categorize them accordingly.
Step 2: Calculate profitability
Your accounting software should help you match sales to customer groups. But that’s only part of the equation. Once you know what revenue each group is bringing in, you’ll need to calculate what each group is costing your business. To get an accurate idea, add up the following expenses. First, you’ll want to calculate the amount you spend acquiring those customers through marketing. Next you’ll add the amount you spend on servicing and retaining them through staffing, facility costs, and follow-up service.
To make your cost analysis truly granular, you might want to hire an analyst. But even rough estimates should give you an idea of which customer categories are truly profitable, and which are wasting your staffing and marketing dollars.
Step 3: Cull the herd
Armed with this information, you have several choices for boosting profits. For your unprofitable customers, you might create policies to make them more lucrative, such as limiting free resources or restricting your services. Or you might decide to cut ties with them altogether by closing down a location, or by no longer marketing to a specific demographic.
But the real advantage lies in having identified your profitable clients. Now that you know who’s pumping money into your business, you can devote more resources to engaging them and tailoring your offerings to their preferences and needs. You can also devote more of your marketing budget to courting new customers just like them.
Never assume you know right off the bat which customers and clients are your “best” ones. A basic analysis of customer cost and customer revenue can always yield some surprises. But once you do know, you’ll be eliminating needless waste from your budget – and positioning your company for higher levels of success.