How to sack a customer
A business relationship needs to be mutually beneficial. If it isn’t, you need to know when (and how) to walk away. Steve Keil explains.
Conventional marketing is not quite applicable anymore. Today’s modern and most advanced marketing techniques require you to not only know your customer, you should also understand their needs and behaviours. This makes it easy for you to understand exactly what a customer wants so you can market your products and services in a way that will meet their levels of expectation.
Understanding customers also makes it easy for us to continuously amend our products and services, ensuring we cater to current market needs. Clustering similar customers or even products and services, means we are now understanding market segments, enabling us to develop standard and efficient processes to market to them in order to target them with the type of things that data suggests they desire.
This is not just true for businesses that sell tangible products, but also holds true for those in the services industry. Electrical contractors are no exception. We operate in a highly fragmented market with plenty of competition out there, and lots of opportunities. As such, you need to be able to market yourselves, keeping customers in perspective.
Sometimes a better understanding of your market and how it is segmented helps you to know your customers and type of work that you enjoy doing. You know, the stuff that keeps you jumping out of bed in the morning and getting excited about solving people’s problems. The flip side is you also identify the work that saps your energy and the customers you don’t want to be working for.
By applying a financial filter, you’ll also understand the most (and least) profitable customer segments of your business, with the ideal delta point being the most profitable segments that energise you and that you also enjoy doing.
Not understanding your customers from a segmentation and financial bias is fraught with danger. Ignorance may well be bliss, but it can also bring pain. Let me share a real example from a few years ago.
Sacking a Customer
A friend who I’ll call Jimmy (simply because I’m currently reading Working Class Boy by Jimmy Barnes) operates an electrical contracting business. The business has grown well over the past few years and at the time, employed 11 site workers. Yet profits were dropping to the extent that it was a major stress point for Jimmy as it was threatening the future viability of the businesses.
Additionally, a major customer of his, a new home builder that I’ll call Builder X, was putting enormous pressure on him to reduce rates even further. The squeeze by Builder X had been going on for several years, and Jimmy had complied and reduced his rates. This put the business in a pincer of reduced rates while wages and product prices increased.
On analysis, the business had moved from a balanced portfolio of markets, being consumers, B2B service and maintenance and new residential construction, to 70% new residential construction, coming from five builders.
Ordinarily that would be fine, particularly for a business setup for this type of work. However, a quick financial analysis found that work from four builders was profitable and with respectful relationships with those builders. However, the relationship with his largest customer, Builder X, was neither profitable nor was he treated with any respect, especially around payments.
Builder X made up over half the volume of his new home construction market segment. More importantly, Jimmy’s business made a loss on every job completed for Builder X, once you factored in all his costs and overheads. Let that land for a moment.
Before you judge, it’s not unusual for non-profitable customer data to be lost in a total monthly summary P&L. You have to be wired to analyse your business in this detail and if you’re not, it’s important that you get someone who is, whether that be a trusted accountant, bookkeeper or business coach.
On a positive note, the stress point for Jimmy also became the easiest way to fix the profitability of his business. That is, get the customer profitable or sack them. Additionally, invest time and effort to attract more business from the profitable segments that you most enjoy doing the work for.
My conversation with Jimmy went something like this.
Me: “You need to put your rates up to Builder X.”
Jimmy: “I can’t; he won’t accept them.”
Me: “Then stop working for him, he’ll send you bankrupt – Sack this customer.”
Jimmy: “I can’t, I need the volume.”
Me: “You don’t need the volume mate; you’re paying him to wire his houses! You’d be better off standing on the corner of Collins St, handing out $100 notes to everyone who passes by. At least they’d be nice to you and like you. This guy treats you like crap.”
Jimmy: “Ok… ok, so how do I sack him?”
It is a constant point of frustration for me that our highly skilled industry undervalues the services we bring to the community. As electrical contractors, we tame a life threatening element that we’re all reliant on for the day-to-day comforts of the 21st century. We spend several years training to do so skilfully. Those with an entrepreneurial spirit take even higher risks by starting their own businesses, ultimately providing jobs and taking responsibility for the safekeeping and economical security of those employees and their customers. Rant over.
Part of the discussion with Jimmy prior to suggesting he sack Builder X was highlighting that his consumer work was highly profitable, as was his B2B service and maintenance segment. Jimmy shared with me that he loved doing that part of his business, as did his team, due to the diversity of work that came through these segments.
He enjoyed the new home market, too, as it did provide a solid foundation of core ongoing work, albeit at lower margins.
The strategy was set that working with builders had to be on agreed terms, not on those set by Builder X. Jimmy set up a checklist for what a business relationship with a builder should look like. It was a partnering and co-dependent one, where each party respected the other’s expertise and services. It included agreeing on rate schedules that valued the skills and high level of services Jimmy’s team provided.
Customers aren’t always equal
I’m an advocate for the contractor/customer relationship being a partnering one, built on trust and mutual respect. There are some customers, though, that believe in a win/lose relationship. When confronted with such customers, the best way to manage them is by controlling the relationship tightly and ensuring such customers understand strict expectations, including payment terms.
And that’s how Jimmy sacked Builder X. He met with him and highlighted his new rates, payment terms, the way he expected work to be distributed and other factors needed for the business relationship to work successfully.
Jimmy confirmed that he’d be more than happy to work for Builder X, but it would have to meet his businesses criteria.
Not surprisingly, Builder X didn’t agree to these terms, effectively stopping Jimmy from doing his work.
Lines were drawn. Jimmy moved on and successfully rebuilt a balanced portfolio of profitable work, while retaining a selection of boutique home builders that valued his services.
I received a call from Jimmy about 18 months later. He highlighted that Builder X had called him and asked whether Jimmy would honour the rate schedule provided 18 months earlier. Jimmy politely declined but highlighted that he’d be happy to work with Builder X on his new rate schedule and payments terms, which were now 14 days from invoice.
Builder X accepted the terms. Apparently, he struggled to find a contractor in the area who could provide the quality of service that Jimmy’s business did.