Do You Know Which Customers Impact Your Bottom Line the Most?

dollar_sign-resized-600In order to maintain a healthy enterprise, you need to know who your best clients are and make sure those clients' needs are being well served. Nothing can kill a business faster than the sudden loss of a client that drives a significant portion of the company's revenue stream.

But how do you know who your best clients are? Does experience drive your evaluation of each customer, or do metrics? And, for that matter, which metrics do you consider to be the most important?

Your "best" clients aren't necessarily your largest accounts.

Often, a large client can run a firm ragged. They may sign long-term contracts and guarantee a high volume of orders, but they also tend to negotiate for deep price breaks associated with that volume. Even though you get a lot of orders, your margins may be slim.

Moreover, high-volume clients can be intensely needy. They often have quick turnaround times for each new project and may treat your firm more like a vendor than a partner. Sometimes, it's just not worth the hassle.

Instead, it may be more beneficial to concentrate on clients that yield the most profitable orders. Their projects may come fewer and farther between, but if the margins are sufficiently high, they can keep your revenue stream high while reducing stress on your workforce.

Referrals equal revenue. Keep your high-margin clients happy!

Smaller clients that seek your organization out for its capability, rather than its capacity, will often refer you additional business. A client that wants to monopolize your company's attention is not going to do so.

Smaller clients, though, are not necessarily threatened by your willingness to develop a portfolio of customers. In fact, they may help you to identify new clients by raving and ballyhooing about the service your organization has provided them. As MarketingZone noted, “your most profitable customers will be people who act like a free sales force for you by referring profitable new customers and acting as brand advocates spreading credible, positive word-of-mouth.”

So how do you identify your best clients?

You should be tracking the cost of maintaining your relationship with each client, and that entails tracking not only the cost in material and wages, but also in labor hours and percentage of dedicated resources.

If, for example, you have a client that brings in a gross annual revenue of  $3.5 million, but this requires an expenditure (after material, training and wages paid) of $3.395 million, you're only realizing a margin of 3%  roughly inline with (but never outpacing) average annual US inflation rate over a 30-year business cycle. Sure, you're turning a profit, but next year, those dollars are going to be worth less and you're no better off. And if 80 to 90% of your workforce is dedicated just to keeping up with that client, you can't take on additional clients to get ahead. Instead, never sign a client that yields less than a 6% profit per job while utilizing 50% or more of your workforce.

Ideally, you should seek out clients that yield a 10% margin (or more) per job, utilizing less than 25% of your workforce. This will allow you to take on additional customers that would even out downtimes your existing clients' order cycles, but also give you the flexibility to redistribute your workforce's attention if an order surge occurs for one account.

Remember, your best clients now may not always be your best clients. Business conditions change.

You should be sure to keep a close eye on your clients' industries and their relative success within those industries. If a client's revenues and/or market share are falling now, their orders will likely fall off in the near future, or they will seek additional pricing concessions.

Likewise, if a client's business is now booming, the potential that they will soon grow too large for your workforce to effectively serve, or that that will begin to demand a high-volume, low-margin relationship, will increase. If, however, their success can translate into your company's additional success, you need to be open to the possibility that your company will need to hire additional staff or invest additional capital. Just keep watching your customers' metrics; use your experience to guide your company's actions.

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RDI Corporation was founded in 1978 and is headquartered in Blue Ash, Ohio. We provide precise business solutions through a fully integrated outsourcing model and our clients ranged from mid-sized corporations to distinguished Fortune 500 companies.