For a small business, every customer is important. They are who keep you in business, they are who can spell doom for your business. But what about bad customers -- customers who cause your business more harm than good, who cost you more time and money than they are worth, who haggle on prices after agreeing on them, who pay late or even don't pay at all . . . who are unprofitable and rob your sanity. Shouldn't you drop these customers?
So, how to identify bad customers? They place unreasonable demands on you; they seek so much attention that you find it difficult to focus on more deserving customers; they are always in need and contact your businesses more than the average, killing your productive time; they purchase in very small quantities, resulting in cost over-weighing profit; they are price sensitive and constantly negotiate; they don't pay on time or pay at all . . . and I think you can add many more to this list.
Can't we avoid a bad customer before we even start doing business with him? Obviously this is the right thing to do, but unfortunately it could be maddeningly tough to identify a difficult customer at this stage. The only wise thing we can do here is to check the financial background of a client, but by doing that we cannot prevent a financially solid customer from turning for the worse later, or a well-to-do businesses from turning ugly when it comes time to pay.
Having said this, I don't suggest a small business to enter into business with a customer without checking the latter's financial background first. In fact, I think one should also ask for trade references and bank references, which could also very useful to learn about a prospective customer's behavior. My point is that a small business should always be on the lookout for warning signs.
I think assigning revenue and cost is the best way to find out whether a customer is worth-nurturing or not. While doing this, you may find it a little trickier to determine the costs, unlike the revenue part. Here, I think you should try to determine the total costs of an individual customer by assigning costs of goods sold plus all the estimated costs involved in marketing, customer care service and follow-up. This exercise might not give accurate numbers, but it still can be enough to identify your ruinously unprofitable customers.
And once you identify those bad or unprofitable guys, don't hurry. Think twice - is it the right step you are taking? Is there no way out such as cutting costs or raising prices for an unprofitable customer and thus to turn him profitable? Is a customer really difficult or is he just going through a difficult time? And even after this, if you are convinced that you cannot work with a customer, it is the time to take the tough decision: let the bad customer go, and devote your time and energy to those that matter.
Until the next time...
George.
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