Entrepreneur

3 ways to avoid costly customers

(Editor’s note: Clate Mask is co-author of the New York Times bestseller Conquer the Chaos and CEO of Infusionsoft. He submitted this column to VentureBeat.)

Ambitious entrepreneurs push hard to acquire more customers and grow the business.  But too often, we push forward in our business growth initiatives without realizing the cost of acquiring the wrong customers.  These are the ones who complain often, demand extra resources and erode employee morale.  They might add to the top line, but they certainly don’t add to the bottom line—or the balance sheet—of the business.

So, how can you weed out these bad customers and protect your bottom line?  Here are three suggestions I’ve learned the hard way.

Get totally clear on who the target customer is.  This is the most important thing you can do to avoid hemorrhaging cash on costly customers.  The entire company must understand the customer profile in terms of the demographics, the reasons he or she buys and the benefits they receive from your solution.

This clear understanding informs every function of the business. Marketing works to attract these target customers. Sales qualifies in and screens out according to this profile. Product tailors the solution to deliver the desired benefits to the target customers. It goes on and on.

Generally speaking, entrepreneurs don’t invest nearly enough time and effort clarifying target customer – and they pay a tremendous price when their growth ambition outstrips their target customer clarity.

Put metrics in place to measure the cost of a customer.  The old adage of “know thy costs” is important for aggressive entrepreneurs because it’s easy to acquire customers and think the business is doing well, only to find out that too many of those new customers are subtracting from instead of adding to the bottom line.  A few key metrics can help you steer clear of this trap.

These will vary, depending on the type of business you run, but a few common examples are cost of goods sold, lifetime customer value and net promoter score.  Once you have average numbers for your business in these three areas, you can measure any given customer against these metrics.

Sometimes the individual customer measurement is more art than science, but experience has taught me that the costly customers begin to stand out pretty quickly once you have average numbers for your business.

Re-negotiate with or terminate costly customers.  Most entrepreneurs shy away from this game.  Sometimes there may be short-term reasons to serve unprofitable customers, but usually, a business engages in unprofitable business because they haven’t gone through Steps 1 and 2 above.

Assuming you have, it’s time to evaluate the bad customers (and every business has them).  Here’s how best to analyze (and react to) the various types of customer relationships:

  • Demands extra resources but doesn’t complain loudly or erode employee morale—Renegotiate.
  • Demands extra resources, complains loudly, but doesn’t erode morale—Renegotiate and listen.
  • Doesn’t demand extra resources, complains loudly, but doesn’t erode morale—listen
  • Erodes employee morale—terminate.  Quickly.
  • If the customer won’t renegotiate in the above cases, terminate the relationship.

If this all seems like too much hassle, you’ll understand why most businesses continue serving costly customers.  I wish I had learned these lessons earlier in my career because it would have saved my company a lot of grief.


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