MANAGEMENT: Even big clients need to be evaluated every now and then

April 24, 2006

Our business Q: has grown to $5 million in annual revenues and 30 percent of our sales come from one customer. I feel captive to this revenue and our growth is limited because of the demands placed on us by this account.

How do I balance the desire for this revenue with the impact this account has on our operations?

Managing a company that is highly A:dependent on one client presents special challenges. It is a "love/hate" relationship. You love the revenue, but you hate the increased expectations placed on your company by the 800-pound gorilla. Unfortunately, there is no easy answer except that you should constantly reevaluate these accounts.

The conventional wisdom says "the customer is always right." The application of this statement is multiplied when dealing with a customer that represents a significant portion of company revenue. However, all business is not good business-even business with companies that contribute large revenues.

Your challenge is to analyze the value of your 30-percent customer and decide whether you are committed to providing them what they need and what they deserve, or whether you would be better off without them.

Look first at profitability: Do a mini income statement that outlines revenues, gross margins and overhead expenses that are required to service this account. At 30 percent, your customer is producing $1.5 million in revenue for your company. What gross margin are you generating from this business? Is this a good or bad result?

To answer the question, you need to know the gross margin being produced by the other $3.5 million in company revenue. If there is a big disparity between the percentages in favor of the customers in the $3.5 million category, then you know that the 800-pound gorilla is not as valuable.

However, you also need to look at the overhead expenses that relate directly to this customer.

If your mini income statement shows that related overhead expenses are running at a higher percentage of sales as those recorded by your other customers, then you need to question how valuable the large account is to the company. Do the dollars and percentage of profit make sense?

The other questions to ask and answer deal with the emotional toll the customer places on your company, and the difficulty of replacing this customer.

I have seen examples where a customer is so loathed in a company-because of demands, expectations, attitudes, business practices, threats of leaving, etc.- that employees avoid interaction with them, or when they do interact they feel like beaten puppies.

This is not a good scenario, and the fit between your company and the customer might not be the best.

Replacing a difficult or minimally profitable customer is often the biggest consideration. A business owner's judgment can be clouded if the company hasn't made a substantive effort to find new business because of an inability to service it. New sales haven't been emphasized because of the struggle to manage current accounts. This is fear of the unknown. If a sales effort was initiated, could replacement business (at better margins and spread across more accounts) be found?

Often, companies are surprised that worthwhile replacement business is available. In many cases, however, the large client is also the star client.

If you are making good money on the account and the client is reasonable in most cases, then it makes sense to live up to their expectations. Build and improve your operations to deliver for them.



Clegg is president of Carlisle Group Inc./CEO Partners, a consulting firm serving owner-managed businesses. He can be reached at 450-0262; dclegg@ceopartners.net
Source: XMLAr04300.xml
ADVERTISEMENT

Recent Articles by David Clegg

Comments powered by Disqus