You win a good customer, agree a price that works for both sides and start building the relationship.
Over the years the relationship gets stronger, which is exactly what you want, but while that’s happening quite a lot can change in the background. Wages go up, materials cost more, delivery expectations change, payment terms get stretched and little by little additional requirements creep into the service because you want to look after a good customer.
None of these things necessarily causes a problem in of themselves, but over time they can completely change the economics of the account.
The strange thing is that we don’t always notice it because they’re still a “good customer”.
They order regularly, you know the people, everybody gets on well and the turnover looks healthy, so there isn’t an obvious reason to question the relationship.
I’d question it anyway.
Not because I think businesses should start squeezing every last pound out of their customers. That’s a very short-term way of thinking, a good commercial relationship needs to work for both sides.
I’d question it because there’s a big difference between a good customer and a profitable customer, and ideally you want them to be both.
What does the customer really cost you?
Most owners can tell you roughly what their biggest customers spend with them, but I’m not convinced enough businesses look at what those customers actually consume and really generate in the way of bottom line profit to the company.
You might have two customers each spending £250,000 a year, which on the face of it, make them look identical.
One places predictable orders, pays on time, rarely creates a problem and deals happily with the team. The other constantly changes requirements, expects urgent turnaround, needs senior people involved whenever something goes wrong and has accumulated a list of little extras that nobody charges for because “we’ve always done that for them”.
Same turnover. Completely different customer.
This is where I think historical relationships can sometimes cloud commercial judgement because the business stops looking at the account as it would look at a new piece of business.
A very simple question is: if this customer walked through the door today, would we agree to the same deal?
If the answer is yes, great.
If the answer is no, I’d want to understand why we’re still doing it.
Old pricing can hide in plain sight
Pricing is another area where this happens because price increases are uncomfortable, particularly with customers you’ve known for years.
So businesses tend to absorb things.
A bit more labour here, another delivery there, increased insurance, energy, finance or material costs and before long the margin you originally agreed upon has quietly disappeared.
You haven’t deliberately reduced the price. In real terms, but that’s effectively what you’ve done.
Again, that doesn’t automatically mean putting the price up.
There may be very good reasons for accepting a lower margin from a particular customer. They may provide predictable volume, pay exceptionally quickly, give you access to another market or simply be extremely cheap to service.
That’s a commercial decision.
What I don’t like is the margin disappearing by accident.
Before chasing more turnover, look at the turnover you’ve already got
There is always pressure in business to find the next customer, generate more leads and increase sales. I’ve spent a large part of my working life in sales and business development, so I’m hardly going to argue against winning more business.
But there’s a point where adding revenue to poorly understood margins just makes you busier.
Sometimes the better opportunity is already sitting in the customer base.
Look at the accounts that haven’t been reviewed commercially for several years. Look at what has changed since the original agreement. Look at the additional work that has gradually become normal and, importantly, look at whether the relationship is still working properly for both sides.
Profit gives a business options that turnover on its own never will.
And if the objective is to build a business that ultimately creates wealth, choice and freedom for its owner, understanding where the profit really comes from is far more important than simply knowing how much you’re selling.
So I’d start with the customers everyone describes as “good customers” and ask a slightly different question.
How good are they commercially?