Insights

How Do Your Profits Erode?

It's who you know, right? Well, do you know any of these? Every customer is important, after all, and without customers, you don't have a business, right? And your customers (or clients) need to feel like they're your most important.

While your inclination is to provide your best, there are certain types of customers who can literally drain your bottom line without you, or them, even realizing it. Below are examples of the types of customers to be aware of, the profit-draining habits they engage in and how you can prevent them from having a negative impact on your employees, your operations and your profits.
 
The High Maintenance Customer (HMC)
The HMC combines drama, disorganization and desperation to a majority of their dealings with its vendors. This customer plans its purchases poorly. Have you ever received an incomplete list of materials? Has HMC ever ordered quantities in excess of its true needs just to make sure that there is enough material on a job-site? Have you ever had to send a truck to pick up this extra material?

Having this type of customer requires a lot of manpower, patience and money. How, you ask? Can you handle the truth? Late day requests for an early delivery the next morning will inevitably cause you to incur unnecessary OT to pull and pack the order, and load it onto a truck. It may very well result in your driver having to start earlier the next day so that all of your morning commitments can be met. This earlier start may very well cost you OT hours, too. The HMC may provide your company with large, attractive contracts. It knows this volume buys them clout, and, hence, will try to take advantage of that. Do you want to accommodate the HMC? Of course you do. Do you know who's going to pay for these extra OT hours? I think you do. What is the response when you explain to HMC that its unreasonable requests can't be accommodated, or you have to start charging a re-stock fee for the frequent requests to pick up extra material? Most likely not good!

So, how do you manage the HMC customer? It's not easy, you have to express your position and find some middle ground.

Here's what you can do to limit the damage to your bottom line:
  1. Schedule a dinner meeting with HMC. After enjoying an adult beverage together and discussing current and future business, talk about the adverse effects that HMC's purchasing has on your operations. Let HMC know that you value its business, and how you're willing to accommodate its requests to the greatest extent possible. But let HMC know that there has to be some reasonable expectations in place about placing orders that is fair for both sides.
 
  1. Establish a cut-off time for all customers, and let HMC know that orders placed after that time cannot be guaranteed for early delivery. Inform HMC that you will be able to make a next day delivery, but not a “first.” You will discover that most of these requests for a “first” are exaggerated, and HMC can and will happily accept a delivery later in the day. This is a win-win. For you, less unnecessary OT costs. For HMC, the next day delivery it really needs.
     
  2. Establish a return policy for all customers. Make sure you have boilerplate on all your sales quotes, order acknowledgements and invoices that states this policy (while you're at it, add something about your order cut-off time policy, too) When HMC requests a return, remind it of this policy. At your dinner meeting, explain that there is an obvious trend for excessive quantities ordered and the resultant impact on your bottom line. Bring specific examples to illustrate your point and make it incontrovertible. Remind HMC that you provide competitive pricing and attentive service, and ask HMC to speak to his procurement staff. The procurement staff needs to be told to be more precise about how they order. Sometimes a polite request of HMC to speak to its staff can bring about some short term relief. When the pattern re-emerges, speak to HMC again. This way, even though you will never eliminate this, you can contain the damage to your bottom line.
     
  3. Consider the possibility of what life can be like for you and your employees if you lose the business, and find out that you can be more profitable on less volume.
 
The Juicer
The Juicer brings the pain. How bad is the pain?  There's a line from Les Miserable that comes to mind: "It's a pain that can't be spoken." In business, the Juicer relentlessly and mercilessly squeezes your margins. You simply can't sell to the Juicer without lowering your price. Ouch, that really hurts. Someone please call the Margin Police, my gross profits are being assaulted!
Is this your relationship with the Juicer? Is that you I see in the middle?

The Juicer isn't from the payers. It avoids collection calls and predictably requests a “copy of the invoice” when you try to get paid. The Juicer will do whatever is necessary to avoid paying you.
The Juicer is also an administrative nightmare. Why? Because it consumes an enormous amount of your internal resources, including inside sales and customer service, while being one of your least profitable customers.

Here's an example of how the Juicer earns its name and how it drains your company's resources. The Juicer asks for a price. A little later, as an expression of customer loyalty, the Juicer informs you that a competitor will see the same item for less. This results in a reboot of the sales cycle – a lower price is requested of a senior sales exec, gets approved, and then relayed to the Juicer. Been there, done that already? With the Juicer, expect to do that several times.

Does the Juicer ever make adjustments to your invoices for items not covered by a contract? This is another way the Juicer squeezes your margins.

How can you handle the Juicer?: 
 
  1. Establish contract pricing and hold to it.
 
  1. Assign someone the responsibility to monitor contract expiration dates so that contracts can be renewed.
     
  2. Get the Juicer to sign off on all price agreements – this can be your contract, or a sales quote for something needed but not covered by the contract. Do not accept a verbal “ok” as the Juicer's agreement to the quoted price.
     
  3. Review all contracts to be renewed, along with a margin report for the Juicer. Determine if it makes sense to continue doing business with the Juicer. If so, proceed with caution and make sure the Juicer stays in its lane. You don't want the Juicer to have any opportunity to start negotiating already agreed-upon (and quite favorable to the Juicer) prices.
     
  4. Do not be afraid to lose the Juicer's business. Maybe you can maintain your profitability on less volume, and deploy your resources in ways that better serve your operations. Tasks other than handling Juicer-related issues can be accomplished with less stress.
     
  5. Understand that one of the very hardest things to do in business is to effect a price increase. Without the ability to have your value recognized by the Juicer, the downward pressure on your margins will be constant. It's hard enough to make money today. Are you sure that your margins can remain depressed or reduced even further? Defend your margins, and confine the Juicer to contract pricing.

The Next Project Client (NPC)
An NPC is familiar, I'm sure, to those in most industries. NPC is there to dangle the proverbial carrot. Although the NPC has agreed to and signed your carefully prepared proposal, once the project commences, the NPC begins to request frequent “short” meetings to make sure you're “all on the same page.” Keep in mind, if you haven't budgeted for all of these meetings, these “one-off” meetings can really add up. You explain to NPC that there was a provision for meetings in your budget, and this was discussed in detail during the project kick-off meeting. You are equipped with your own calculations on the damage to your bottom line caused by these extra meetings. You've taken “lessons learned” seriously from past experiences and learned from your mistakes. You understand how dramatically this hurts your bottom line. You're ready for this discussion. So, what happens next?

NPC says it understands your point, but can it have this one-time meeting just to clarify any number of issues and concerns. Of course you agree, and the meeting involves several members of the project team, and the one-hour meeting lasts 90 minutes. A short period of time passes, and the NPC requests an unscheduled meeting. Now what? With the deftness of a cat burglar, NPC informs you of how pleased it is with the project's overall progress while making the first reference to an upcoming project and how badly it wants you to win the bid. A client like this can lead to your projects profitability and your firm's utilization rates plummeting!

What to do with NPC?
  1. Schedule a project kick-off meeting and make sure you have all the right people in attendance.
     
  2. During the KO meeting, take the time to review the individual line items included in the budget. This doesn't have to be lengthy, but make sure you specifically review the frequency and length of scheduled meetings.
     
  3. Document your firm's process of change-order management in your proposal and contracts (and get these documents signed before any work commences). You know all too well that this is where profits melt as fast as soft ice cream under the July sun, so it's imperative to reflect this in your signed agreements. You understand that extra meetings require a change order, so it's best to deal with this now and begin the process of preventing scope creep.
     
  4. Emphasize change orders at the kick-off meeting. You want to limit NPC's chance of stating that they were unaware of your change order policy. Because you know that's coming, right?
 
What now?:

The above examples are somewhat exaggerated to more easily illustrate areas in which your profits erode. Perhaps these examples may even be reasonably close to your company's bull's eye.
You need to understand that over-servicing your clients and customers is mostly an unbillable activity. Perhaps it's part of the cost of doing business. Perhaps it's something that can be contained, and even prevented to a large degree. 

The less running around, putting out fires, and attending to customer/client-induced DEFCON 4 events your company does, the greater your ability to focus your resources in a more efficient way. Nobody says that you should fire all of your challenging customers. But there are predictable minefields that can be avoided. The damage to your bottom line can be minimized if you remain alert to the customers/clients who cause your margins to be less than your targeted amount, and force you to incur higher operating costs than necessary.
If you know any of these customers and clients, or even their first cousins, I'd enjoy hearing from you and the stories you might share with me.
 
Bruce Latman is a Consulting Manager at Grassi & Co. and can be reached at BLatman@grassicpas.com.
 
 
 




 

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