What's the Secret to Profitability? November 14, 2008 "Not all business is good business."
By Mike LeMaster
Everyone's heard that old adage, but in the current economic climate, everyone’s also trying to keep cash flow robust and it's challenging to turn any business away. So what can be done in situations where you know business is not good for your long-term profitability and will demand the continued commitment of precious resources?
First, you need to understand the economic term "opportunity cost." This translates into having too many chairs at your table. If you fill those chairs with unwanted guests, it won't be long before you are looking for a way to exit these undesirables. Or, you may just choose to leave the house altogether!
The same thing holds true for your business. Every customer consumes your company’s valuable resources. And proactively preventing unprofitable—or marginally profitable—customers from utilizing more than their fair share of these finite resources can be challenging, to say the least.
The Customers You Keep
These actionable ideas can help you be more selective in the customers you keep:
1. Define your ideal customer and establish criteria that are extremely objective. Publish these criteria internally and make sure everybody is aware of the ideal customer. Having established criteria will help your salespeople and marketing people in their prospecting efforts.
2. Make sure that other departments, such as finance and operations, are involved early in evaluating new business along with your sales department. Have a formal review process that is automated and doesn't slow up the selling cycle.
3. Review your current accounts and seek out clones of your most prized customers. This activity will also lend itself to defining criteria for seeking ideal customers.
4. Institute a review process that assesses the profitability of your accounts on a regular basis. You may find that the reality of the business is not as profitable as it was on paper prior to the actual work.
5. Have an exit plan in place that transitions customers out, but in a way that preserves your integrity and profitability. Keeping unprofitable customers in place diminishes your chances of finding or servicing more profitable business. That said, the way you transition them out should not burn bridges or create any collateral damage.
6. Secure new customers who meet or come close to meeting your ideal customer profile. You'll have more confidence to let go of unprofitable business when you have secured replacement business. You may find that your revenue position has not changed considerably, but your profitability is greatly enhanced.
The ultimate goal is to increase profitability without damaging your cash flow position. So, fill your table with guests that you would like to keep for a lifetime. Remember, the customers you retain determine your profitability.
Mike LeMaster is president and founder of Sales Coaches International, LLC. (www.salescoachesintl.com). He can be contacted via e-mail at mikelemaster@salescoachesintl.com or by phone at 630-552-0747.
Sales & Marketing Management Magazine
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