Don't you believe it ... Hanging on to customers is good

In tough times, most firms try even harder to hold on to existing customers and to gain new business on the best terms they can.

by Alastair Dryburgh is head of Akenhurst Consultants,
Last Updated: 31 Aug 2010

But the right thing to do may be exactly the opposite. In a harsh market, it's vital to be highly selective about who you deal with. Here's why.

Some customers lose you money, even in good times. Companies must come to understand the profitability of each customer, or customer type. My experience is that the result is always surprising - even shocking. I found a consultancy where a third of its effort went into projects making almost no money, and a logistics company that had a contract that cost it 20% of turnover. With severe pressure on pricing, this condition gets worse, not better. With margins lower, you can no longer afford these drags on profitability.

Seemingly profitable customers can impose an unprofitable opportunity cost. One firm that found this recently was a major supplier to Woolworths - Woolies accounted for 25% of its turnover until going bust just after Christmas. So it redeployed its 100-plus field salesforce to other opportunities. Turnover was down, but profits went up by 40%.

Some customers are bad for cashflow. They might pay late, or not at all. I recently spoke to a supplier to the airline industry; his European customers took 90 days to pay, but his US suppliers wanted cash on delivery. With credit as tight as it is now, would you even try to finance this sort of business? Even if profitable, it could push you over the edge.

If there ever was a time when business at any price was a viable option, it's not now. You need to be picky, and to have good information, good judgment - and strong nerves.

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