As we begin a new year, most businesses are focusing their time and attention on growth – sales growth, market growth, profit growth, etc. Growth is a very common element of a company’s strategic planning – as it should be.
Many companies, however, do not get clear about specifying the type of growth they want. They mistakenly believe that all growth is good for their business. I would suggest diving into the question of growth a bit deeper and ask yourself, “What is the right kind of growth for our business?”
Asking this question is central to clearly defining your company’s strategy and choosing which markets to play in, which products or services to play with, and which customers to focus on. All of these decisions are conscious choices a company can make; after all, it’s your business and you get to decide.
So, the notion of firing customers seems counterintuitive to a discussion about growth in the new year! However, the best and most valuable companies have clear definitions about their ideal customers and the characteristics they require in customer relationships. And, they are okay with saying “no” to customers that don’t fit their business model. Here are some suggestions for evaluating your customers:
- What is the minimum annual volume necessary to be a customer?
- What are the standard product/service delivery mechanisms we accept in a customer?
- What are the minimum pricing and margin requirements for a customer relationship?
- What are the minimum acceptable payment terms expected of a customer?
Most companies do not provide clear guidance to their employees on these issues and often end up with a conglomeration of customers, many of which are not profitable for the company. In fact, it is not uncommon for as many as 20 percent of a company’s customers to be unprofitable.
So how does the concept of weeding out unprofitable customers support your growth plans for 2018? Here are a few things to consider:
- It increases profits immediately, without adding a dollar of cost or expending any additional effort. This is really low hanging fruit that exists in every company.
- It frees up capacity in your operations to serve new customers that you acquire (with presumably better economic characteristics). Since you have capacity, you should be able to serve these customers without increased overheads.
- It frees up your administrative resources (e.g., customer service) to focus on those customers that add the most value to the company.
The decision to fire a customer is counterintuitive, which is why many people cannot bring themselves to do it. However, the impact to your business can be profound it you can separate yourself from the emotional baggage that comes with it.
Doing so will give you a jump-start on your growth goals for the new year.
Mario O. Vicari is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
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