Getting Low-Profit Customers To Pay Their Way

A friend who owns a small business — he does IT and computer work for other small businesses — recently told me about a customer of his who became, over time, “expensive.”

The customer constantly called, asked for favors, and complained about charges, even though my friend was delivering above-and-beyond services whenever the customer snapped his fingers. Eventually, the account became a profitability drain, sapping services — and requiring precious time — without bellying up to the true bill.

So, frustrated, my friend informed the customer that he was raising his rates — higher still than what the customer had complained about in the past. My friend came to realize that the customer was no longer profitable. By raising his rates, he could cost-justify the additional services, as well as the headaches.

Distributors should perform a similar type of account analysis, preferably before an account becomes problematic. Distributors should know the cost of certain services, then look to ensure that customers are paying for what they receive. If they’re not, it might mean a candid discussion with the customer is in order: Is a price increase necessary? Would the customer agree to reduce the number of services it requires?

Weighing intangible costs against gross margin gives a distributor a true profit picture — an inside look at the cost/profit balance. In-the-know distributors can then make steps toward improving account profitability.

This month’s cover story, “Show Me the Money” focuses on identifying those customers that cost you, and finding ways to improve their profit status. The article includes advice on singling out low-profit customers — through computer programs and other methods — and devising a strategy to increase their profitability.

I asked my friend that day whether he thought the rate hike would send the customer running to a competitor. “Probably not,” said my friend. Now, at least, the customer will be worth the trouble.