Hello everybody, welcome back to Scott's Corner. I recently had a conversation with one of my customers regarding a big customer of his that was very demanding. This customer had great volume but a low profit margin. My customer was considering telling the customer that he no longer could do work for them under current conditions. They want to put in place some policies that would help make it possible to keep the customer while, at the same time, pay more attention to other customers. These smaller customers were sometimes neglected because of the demand put on them by the larger, more demanding customer. This is a dilemma that many of us may have encountered in our business past. If you haven't you may encounter it at some point in the future. It is a very perplexing situation.
So, today we are going to talk about those customers of ours that may actually be keeping us from showing growth in other areas.
The type of customer I am talking about here is the one that brings a large amount of consistent work. Many times they also have a low profit margin with the higher volume. The same customer can often bring in rush orders that you feel obligated to complete by the rush date because you don't want to jeopardize the relationship. This is great! You have consistent cash flow, assuming they are a good paying customer, and the machines are always running. But, you may want to ask yourself if this particular client's work is keeping you from growing your company into a more profitable company. One with a less demanding schedule and more "LIFE TIME" for you!
Rule-of-thumb, it is a good company policy to have no one customer make up more than 20% of your overall company's revenue. A lesser percentage is even better. This makes it possible to have a large client leave and not completely destroy your cash flow throwing you into survival mode.
The larger customer may be inadvertently keeping you from a less stressful and more profitable company. Why?
This "whale" customer may be keeping you from paying attention to smaller jobs that have a higher profit margin. You may also be ignoring possible work that is available in your area of the same type of smaller orders with the higher profit margin. By taking control of the larger customer and setting some policies that allow you more machine production time for the smaller, more profitable orders you can create an environment in which your company can experience a higher net profit margin from less work. Now don't we all want that!
My family has been in the embroidery industry, as a production embroidery company, for more than 30 years. The same situation was encountered by my family about seven years ago. We had the larger customer who was great for paying and great for consistent work. But, that customer was very demanding and was making it difficult for us to pay attention to our smaller customer orders.
We found that some of our smaller customers began going elsewhere because we were not able to give them the same delivery service we had in the past. Due, of course, to our machine production time being mostly tied up with the one larger customer's orders. Even when time was allotted for the smaller orders, it would many times be taken away to accommodate a rush order that popped up from the "whale" customer.
This is a tough decision for any company and every situation is different. In our case we began seeing a trend toward relying more and more on the one "whale" customer. Then we decided to implement some policy changes with the larger customer that would allow us to begin growing with the smaller customer's orders again. In doing this we risked losing the larger orders altogether. We gave up about half of the larger customer's work and took the hit in sales for the short term. We began focusing on the smaller but more profitable orders. Within two years we built the business' gross sales back up, but by servicing the smaller orders with more profit potential. My family now enjoys a better quality of life. They are not as tied to the business since they are able to work less hours. They have now increased net margins to exceed the previous numbers when we ran two shifts and worked all the time to service the larger customer or customers.
So, when I was speaking to my friend and customer about this subject I told him this story. It's a conscious decision that has to be made based on your personal circumstances. But, in our case, our philosophy changed and we worked to create our business around the smaller more profitable type of customer. In the long run we have found these customers to be more loyal in both good times and bad.
I hope this story might come in handy for some of you who may be facing the same dilemma. I want to thank you for joining me here at Scott's Corner and I look forward to seeing you all again next time.
For now take care and make a prosperous 2010