Carraghyn - Chartered Directors

Why You Should Ditch Your Customers

bumped into a friend recently, the CEO of a long-established and successful medium-sized company. We chatted briefly about business, both bemoaning the impacts of the current economic climate, and he recounted to me a story about a client.

 

The client in question had been using the company’s services for a long time, decades, and like many was feeling the pinch and looking for savings - including from my friend’s employer. In respect to such a long-standing client my friend reviewed the client’s account personally, and discovered that the company had been providing its services at a loss for years. Sadly he went back to the client and explained that far from being able to engineer any savings for the client, the company was going to have to cease providing services as it could not justify subsidising the client any longer.

This set me thinking about two lessons I’ve learned recently:

In one I reviewed the costs of a business and the client income, and discovered that a high proportion of the longer-established clients of the business were simply costing it money. Like my friend’s employer this business was effectively subsidising many long-established clients because it had been unwilling or unable to get the clients to accept price rises over time.

The other was an article in Forbes magazine explaining how employees who stay with one employer for a long time are disadvantaged in reward for their loyalty, whilst those who switch jobs every couple of years end up earning massively more http://www.forbes.com/sites/cameronkeng/2014/06/22/employees-that-stay-in-companies-longer-than-2-years-get-paid-50-less/.

It is clear from the Forbes article that the same effects are in play for loyal employees as for long-standing suppliers, loyalty and durability generate smaller, less frequent income increases than frequent change. This leads to the inevitable conclusion that companies which dump clients on a regular basis are potentially more profitable, because each new client take-on provides the opportunity to do business on new, better, terms whilst each loss of a legacy client may be relieving the business of a loss-making burden.

Obviously the answer is to be stronger about pushing through necessary price rises on a regular basis, but just as loyal employees are weak at demanding salary rises, sales people are often reluctant to push price rises and risk breaking the relationship with long-established clients.

In the final analysis, as the old adage goes “turnover is vanity but profit is sanity” - better to be small and profitable than big and marginal. It might be time to review some of your customers and ditch the ones who aren’t prepared to recognise your value at todays prices.

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