How Having Fewer (More Profitable) Customers is Key to Growth
Every business wants to grow, but they often lose sight of the type of growth they should be focusing on. Instead of focusing on growing your customer base, you should care more about growing the right type of customers.
A few years ago, a young entrepreneur had more customers then he knew what to do with. He believed that his meant his business was headed in the right direction. Unfortunately, he quickly started to get burned out. As he earned new customers, he had to deal with several major problems, including:
- He had to spend large amount of time answering questions for high maintenance customers that didn't want to deal with small things on their own.
- He had to keep track of dozens of small projects. He was constantly worrying that something would fall through the cracks, because there were so many things to monitor.
- Many of his new customers weren't very committed, so he needed to spend a lot of money on advertising to replace them.
- Many customers were chronically late paying their bills. Some of them didn't pay at all. Since he depended on payments from a couple of dozen different customers, this caused some issues with his cash flow.
This entrepreneur realized that he needed to make a change. He began rebranding himself, so that he could focus on serving a smaller number of premium customers. He reduced the number of customers he was serving by 80%, but his business was better off as a result. He earned more money, while also having less stress.
This is a factor that the CEO of Clients on Demand Russell Ruffino mentioned on his Entrepreneur interview. You should take his advice to heart, so you can grow your business more sustainably.
Is having fewer customers the key to running a successful business?
The short answer to this question is, yes. Every business wants to grow, but they often lose sight of the type of growth they should be focusing on. Instead of focusing on growing your customer base, you should care about sustainable revenue growth. Here are some reasons that focusing on a smaller number of higher quality customers is usually the way to go.
You have the opportunity to earn higher customer satisfaction ratings from your higher quality customers
You need to be realistic about your ability to serve a large number of customers, while also keeping them satisfied. Every business is constrained by their resources. If you take on too many customers, you will be spreading yourself too thin and unable to make them all happy.
Focusing on working with a couple of large customers will make your job easier. You will have more time and resources to allocate to them. Some of the most successful companies only served two or three large customers.
You don't need to deal with as many unexpected surprises
There is a lot of uncertainty every time you take on a new customer. You run the risk that they are not going to pay your invoices, even after you spend a lot of time and money doing the work for them. Most business owners also find that there are misunderstandings that they were not expecting. Your customer may tell you that they wanted one thing, but change their mind and insist on something else after you have already done the work. A small web development company in Northern California ran into this problem and needed to sue the client for refusing to pay for the work they had previously agreed on.
You are taking a gamble that you will run into a problem like this every time you hire a new client. You can significantly reduce these frustrations by maintaining longer-term relationships with a smaller number of customers that don't create problems.
You can have more mutually productive relationships where both sides learn and grow
The obvious benefit of doing work for customers is that you will be financially compensated for your work. However, there are other benefits to consider. Many customers provide additional resources and feedback that can be invaluable to your organization.
Alastair Dryburgh is a business consultant, keynote speaker and author of Business Remastered and Everything You Know About Business Is Wrong. Mr. Dryburgh said that he hosted a speech where he told his listeners to fire some of their customers. He said that the woman who ran the space decided to terminate a third of her members. She said that the relationships between the members of the group became much richer and more productive.
"After your talk I fired 200 of our 300 members. It made a huge difference. Instead of 300 random people who just needed a desk we have 100 members with shared interests who interact and collaborate in all sorts of interesting ways."
Choosing the customers that you want to focus on serving
The benefits of focusing on a small number of profitable customers are clear. Deciding which customers to work with is considerably more difficult.
Here are some things to keep in mind when deciding which customers to stick with.
Ask yourself who you dread working with the most
When Drynurgh gave his speech, he told his audience to do something. The next time that their phone rang on a Friday afternoon, he wanted them to ask themselves which customer they least wanted to be on the other end.
If you can answer this question, then you know that customer may be the one that you need to let go. The customer is either very high maintenance or creates a lot of drama that can infect the entire workplace. Of course, there might be some other considerations. You might be willing to put up with a lot more from a very high paying customer. But if the customer doesn't bring a lot of value to your organization, then you need to seriously consider whether you want to maintain that relationship.
Look at the marginal revenue that you generate from each client
You obviously want to prioritize working with customers that are most profitable. The trouble is that you might be focusing too much on the gross revenue that they generate, rather than the net income. This means that you need to consider both the revenue that you earn from each client, as well as total costs.
This is important to keep in mind, because customers that generate the most revenue also tend to incur the highest costs. You might find that some of your biggest customers aren't very profitable at all. You might be able to find ways to improve your margins by reducing costs, but if you can't then you should consider firing them.
Consider opportunities for growth with each customer
Your target customers might be growing businesses. Some of your current customers might not bring in a substantial amount of revenue, but they could have the potential to grow significantly in the future.
You need to look at the potential of each customer. Pay close attention to their growth rates and do your best to gauge the long-term potential.
Having a Smaller Number of Quality Customers is the Key to Profitability
Choosing the right customers is one of the most important parts of running a business. You don't want to spend a lot of time and resources on customers that aren't going to add to your bottom line, cause you to feel burned out or create more headaches than they are worth. If you are overwhelmed, then it might be time to let some of them go. Your company's future depends on it.