Not every client can be your favorite. That's what Debra Brede, an investment adviser and owner of five-person D.K. Brede Investment Management in Needham, Mass., used to think about one of her most demanding customers. For 20 years, the woman showed up at appointments with bags stuffed with every slip of paper connected with her investments—proxy statements, annual reports, dividend notices—expecting Brede to go over each one with her. Brede did. She wanted to offer good service, and this woman had a $1 million account. That's a healthy amount for Brede's company, which has about $1.7 million in revenues each year.
Then, as part of Harvard Business School's Owner/President Management Program, Brede took a class in which the professor stressed the importance of evaluating the profitability of each client. Brede spent two months doing just that. It turned out that even with a million-dollar balance, this client wasn't a winner. She spent a lot of time with Brede and her staff, but because her holdings didn't change much, she paid virtually no fees. Brede discovered she was losing money on the arrangement. Says Brede: "I was shocked."
Brede calmly told the woman she would have to start paying for the time her account required. That only infuriated her. Then Brede made a tough call: She asked the woman to take her business elsewhere. "Most people are not looking to get more than they pay for," says Brede. "But there is a group of people who will take and take with no respect for my time or my employees' time."
Yes, breaking up may be hard to do, but when a client is costing you money or making you crazy, it can be a smart move. Severing unprofitable or exhausting relationships can, after the initial fallout, boost your company's revenues. Brede cut the cord with about a dozen of her 650 clients between late 2005 and early 2006, freeing her to devote more time to bringing in new business. Profits rose 25% last year, compared with about 9.5% in each of the past few years.
Of course, you don't want to let a profitable client go if losing that revenue could sink you. And no one is advocating firing clients just because they are demanding or you simply don't like them. This situation demands objectivity.
That means it's time for a coolheaded assessment of your clients—how much you're bringing in from each, as well as how much each really costs your company. Clients who aren't cutting it should be candidly and unemotionally presented with options for improving the relationship. Such conversations can get ugly, so be prepared: Your client may balk, wheedle, or fire you. Be ready to let go. "Entrepreneurs have this horrifying sense of scarcity, that the customers they have are the only ones in the world," says G. Richard Shell, professor of legal studies and management at the University of Pennsylvania's Wharton School. "That is not true. But [firing clients] takes courage."
The first step is to do the math. Calculate the annual revenue from each customer and the cost of serving them, adding such factors as the costs of materials and the cost of returned or rejected products. "Not a lot of companies do that," says H. David Hennessey, a professor of marketing at Babson College. "And that's a mistake." The amount of time you and your staff put into a customer relationship or making a product counts, too.
Brede found that the average cost of her staff's time was about $56 per hour. That included salaries, benefits, and bonuses for employees working 1,610 hours a year. She calculated her own time at $300 an hour. To figure out how much clients actually cost her, Brede estimated how much time it took to do common tasks—a full explanation of a client account statement, for example, took 30 minutes—and asked employees to record every action they took on behalf of a client. If clients referred others to her, Brede attributed the first year's revenue from the new client to the referring one. The process took Brede about two months. The results surprised her. A number of clients with accounts of more than $1 million—supposedly the most important ones—were either marginally profitable or costing money.
It is far harder to quantify the toll an abusive client takes on your psyche. Some of the costs of working with a tough client are represented in the dollar value of rejected products or the extra time your staff spends with them. But you should also ask your close friends and family if problems with a troublesome client are affecting your personal life. Not sleeping well, dreaming about clients, obsessing about them, finding yourself repeatedly writing the "you're fired" speech in your head, and dreading calling them are all signs that a client is taking too big a toll, says Shell.
To get the whole story about your clients, speak candidly with your employees. Is dealing with a bad client's behavior cutting into the time your staff should be spending with other customers? Have any employees considered leaving the company because of a difficult client? Has there been abusive behavior? "The customer is not always right," says Justin Kitch, CEO and founder of Homestead Technologies, a 139-person, $16 million Menlo Park (Calif.) company that provides Internet services to small businesses. "That is the most damaging statement that has been made in business." Kitch says he instructs employees to be polite to unhappy customers but makes it clear they shouldn't "roll over and accept abusive behavior." He says clients cross the line when they begin personally attacking the customer service representative or use insulting language.
Once you've identified troublesome clients, however, it's worth trying to patch up the relationship. The cost of acquiring new clients is so high that you don't want to "pull the trigger too fast," says Doug Williams, a Vancouver (Wash.) small business consultant. Present problem customers with ways to improve the situation, ideally in a face-to-face meeting. Are the clients unprofitable? Encourage them to buy additional products or services. Ask them to buy products in greater bulk or lengthen your lead time. Or suggest they find other suppliers for the lower-margin products or services they get from you.
Ryan Gerber, president of RGI International, an 18-employee Cleveland business that helps big companies with corporate events and trade shows, successfully rehabilitated one of his big clients. Gerber says the customer was disorganized and failed to meet deadlines, causing employees to readjust schedules and chase around after late information. Employees complained, but Gerber thought the client was worth keeping because it had been a customer for years, was in other respects appreciative of his employees, and paid its bills on time.
When Gerber calculated how much he was making from the client, he found that net margins for that client were running about 10% to 15%, compared with an average of 35% for other, better organized customers. Gerber came up with new guidelines for the account, including additional fees if the client didn't meet deadlines, and charges for extra work not specified in the contract. He pushed his employees to communicate more clearly with the client about the information they needed and deadlines. The customer has become more efficient, and margins on the account are 30% to 35%. "Yes, they were disorganized," says Gerber. "But we needed to change how we interacted with them."
Brede, too, says that although she has had to fire some clients, she has improved arrangements with about 40 others. One client suffered from what she calls the Cramer Effect: Every time he saw Jim Cramer pound his fist about a stock on CNBC's Mad Money, he would call Brede and ask if he should own it. Her staff was constantly checking his holdings, assessing how the new stock would affect his asset allocation. Brede finally suggested the client put a small share of his money into a discount brokerage account, where he could make frequent, less expensive trades without her advice. The client balked—"I thought I lost him," says Brede—but then he did as she suggested.
Some situations, of course, can't be remedied. If the client has legitimate gripes about your product or service, explain how you are addressing them. And if you sense the problems may stem from bad chemistry, consider making a different employee the main contact on the account. But an abusive client cannot necessarily be transformed. "Going into therapy with your clients is a very unlikely scenario," says Wharton's Shell. "The truth is, people don't change."
Joshua Zerkel would certainly agree. In 2003, he started Custom Living Solutions, a San Francisco company that organizes homes and businesses. As a startup, Zerkel had a client who accounted for 80% of his revenues. "She was very demeaning toward me and treated me like the hired help," says Zerkel. The customer once sent him to buy her boyfriend an iPod, and another time demanded that he break into her home through the kitchen window to get some forms she needed photocopied. After a few months, Zerkel ended the relationship, despite her pleas. "If you are thinking about the client all the time, you have to get out," says Zerkel. "Sometimes it is that visceral." He had promoted his business mostly by word of mouth, and by the time he fired her, other clients had started to come in.
Before you cut the cord with a profitable client, you'll need to be sure you can survive the financial hit. Often that means making up for lost sales by redoubling efforts to bring in new business. Back in 2003, Trish Bear, president and CEO of I-ology, a 22-employee, $1.6 million Scottsdale (Ariz.) Internet strategy company, knew that one customer just had to go. The client, a $7 billion corporation that accounted for 24% of revenues, was constantly dissastified, requiring Bear to attend meetings two to three times a week. The client also rejected many of Bear's proposed strategies. The customer paid in 60 or 90 days, when Bear needed to be paid in 30 days. To prepare for a split, Bear told her staff to do pretty much whatever the client wanted, which allowed her to steer clear of all those meetings. She used the extra time to recruit new business. Six months later, Bear had landed a number of new accounts, and revenues were up 33%. "All that time and energy I had spent on resolving conflict was now spent on getting new customers," she says. When the client's contract came up, Bear didn't renew it.
It can also help to do some role-playing to practice the conversation you intend to have with the client. "That may help you uncover things so that you are better prepared," says Shell. He suggests consulting with a lawyer if you have any doubts about your legal obligations to a customer.
When it's time to lay your cards on the table, don't be coy. Tell your client you can see your services are no longer meeting his needs. You might suggest another company. That's better than hiking prices until an abusive customer leaves. "There is a manipulative component to that that may come back to haunt you," warns Chip Bell, a management consultant in Gun Barrel, Tex. The last thing you want is an irritating—and overcharged—customer.
Once you've purged your list, be selective about who you bring in. Bear admits she took on everyone at first. "If they had a heartbeat, we took them," she says. Now she focuses on companies with $10 million to $100 million in revenues. She figures companies that size are likely to have a marketing budget large enough to afford her services but are still small enough that they don't have internal staff to do it themselves. They're more likely to pay in the 30-day window she needs, and they don't try to boss her around. And instead of jumping into long-term deals, she now starts new clients with an initial 30-day contract. This "dating period" gives her a chance to identify potential problems and talk to the client about them; it also gives the customer a chance to think about whether her services are really a good fit. If not, Bear says, "We have conversations with them to make sure our assumptions are correct, and then we help them find the right partner." Those conversations are rarely easy, but your company's bottom line and your own mental health may depend on them.
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By Amy Barrett