If your business has been in existence for two years or more, congratulations. Very few start-ups survive this long and now you are thinking about growing your business in a profitable way one thing which is essential to do is focus. In this post I want to talk about your client base and how you handle it.
When you first started it is likely that you grabbed all revenue opportunities available to you and right now you have some customers which simply don’t fit with your business model, especially as you grow. In the same way that you may have parted with some of your fellow founders because they simply no longer fitted in the business, you must make the hard decision to stop trading with some of your existing clients. These are the clients that are becoming unprofitable, they’re probably costing you too much to serve and they have little potential growth in the future. So how do you judge this, and how do you solve the problem without creating a bad reputation for your business?
I advise founders to create a simple two by two matrix, where the Y axis is annual client revenue, and the X axis is cost to serve the client. Place each client onto this matrix and divide it into four quadrants. Clients appearing in the bottom right-hand quadrant, who have low revenues but a high cost to serve should be those you address first. You need to find a way of either increasing their revenues to you or reducing the cost to serve them; or migrate them out of your business. If every avenue has been tried, how do you migrate these clients away from you, whilst protecting your reputation?
One way is to have built relationships with your competitors and to introduce these clients to them. It is a truism that one company’s underperforming clients can be a windfall to another. Simply because these clients don’t match your business plan doesn’t mean that they won’t be ‘gold dust’ to one of your (perhaps smaller) competitors. By maintaining excellent relationships with your competitors and understanding what their business model is and what their client profile is, you can facilitate transitions between you in a very positive manner. Trading clients between yourselves is an excellent way of benefiting all three parties.
If there is no such opportunity, then issues with an unprofitable client must be addressed directly and honestly. You must have a hard conversation with what maybe an early adopter of your solution, or user of your product. Explain to them the situation you are both in and what you are trying to achieve for your business and the reasons why they no longer fit with your business model. It could be that your services or product are so valuable to the client that they will accept price increases. It could be that they have no understanding of how much of your company’s time and resources they are consuming, and they will agree to work with you to address this to bring themselves into your profitable client list.
If none of this is possible and you have to part ways, it must be done in a constructive and sensitive manner. Agree with the client a process by which you will cease to trade with each other, guarantee service levels and agree a time scale. Explain the profile of a company where their business will fit and even, if you don’t know of a competitor as I described earlier, try and help them find an alternative solution.
This may seem counter intuitive when you were trying to grow your business, that you will take steps to reduce your own revenue, but it isn’t just revenue you are addressing it is the cost of doing business, your ability to produce cash and your profitability. Think of how you can use the resources that not working with this client will free inside your business. It could be that sales resources, customer support resources and management time can be redeployed to grow another client who is perhaps in your bottom left hand quadrant, already having a low cost to serve and low revenue to you but with massive prospects for growth.
A good example of this is described in Marc Randolph’s book about the birth of Netflix. Many times, they considered the opportunity presented by starting to trade in Canada. It became a watchword inside Netflix for any initiative that would consume resources. Their concern was that by starting to do business in Canada the additional complexity caused by language differences, mailing differences, an additional currency and other factors would divert too much of their attention from their core business in the USA. This may not be a direct comparison with what I have been speaking about, but it illustrates the point I want to make. When your business is young, when you are seeking rapid growth, it is not all about revenue, those days are fading right now. The fashion for growth at all costs is, in my opinion, over. Investors are now looking for businesses that generate positive cash and have a clear path to profitability. It is likely that you will not be able to achieve that unless you review your client base.
Above anything the most important advice I give all businesses which are seeking to grow, is simply focus. Pick a path, follow a strategy, but always focus on what you are trying to achieve and how you’re going to deliver.
