Every small business has a bunch of high-maintenance, loss-making clients. Not every small business owner has done the necessary analysis to understand the numbers involved. They have yet to identify which of their clients are effectively being paid to remain on their client list. This analysis really needs to be performed about every 9-12 months, so you can deal with loss-making clients before they become a massive drain on your profits.
You might think the easiest way to handle them is simply to ditch them as clients. This is an easy option but probably not the best one. Some of these loss-making clients can be moved into profitability, with very little effort. How you proceed will depend, to some extent, on how many loss-making clients you identify during this analysis.
If you have a modest number of clients to return to profitability, you should deal with them individually and find solutions that meet your requirements and which also retains their loyalty to your products/services. If there are too many loss-making clients to handle individually, try to put them into a number of groupings and then deal with each group en-masse. It’s a good time-efficient compromise that will have a reasonable success rate.
Having identified your loss-making clients (and grouped them if necessary) how do you deal with them?
For some of the more marginal loss-makers, the quickest solution might be to simply increase the prices you charge them. This may not be possible in all cases. For example, when you are in some sort of retail environment with items priced centrally or listed online. However, if your clients receive individual quotes for their proposed purchases, then quoting them higher prices would be a relatively easy process.
Other clients might cost you more to administer because they place lots of small orders and the cost of handling and delivering them eats up all your profits. In this situation, consider introducing a minimum order value or minimum order quantity to increase the size of and reduce the frequency of their orders.
Some clients might make higher than normal demands on your after sales service or regularly insist that service engineers visit their premises to inspect equipment. The associated costs will eat into your profits. In these cases, your only option is to charge for these additional services perhaps with a formalised service agreement.
There will be another group of loss making clients who are new clients. These might be in the transition period when they are integrating your product/service into their business. The high levels of support and hand-holding you give to all new clients will diminish after a few months and so will their maintenance and support costs. As mentioned above, it is wise to perform this analysis every few months so you can identify those new clients where costs haven’t fallen as expected. These could become long-term loss-making clients unless you take the appropriate action.
As you can see, there will be a solution in most of the situations you will encounter which potentially returns the loss making client back to profitability. Provided the client agrees to the changes, all is well. If they refuse to accept your proposed changes then you have little option but to ditch them as clients. There is no point in keeping them on your client list. Your profitability will increase once they are moved on to one of your competitors.
- Analyse your clients to identify which (if any) are loss-making
- Develop strategies to bring these clients back to profitability.
- For those clients you are unable to return to profitability, find them an exit strategy as soon as possible.