The cost of acquiring new clients is increasing by the day, underlining the incredible importance of customer retention, especially in the professional services industry. And yet, the once-exception of customer divestment is fast becoming a popular option for firms that want to disassociate themselves from their less-profitable clients. According to the Harvard Business Review, 90 percent of surveyed executives said they had “given serious thought to divesting customers,” and 85 percent said they already had.
Indeed, dropping customers is becoming an increasingly popular option for enterprises. However, such an approach will always entail risks like impacting the bottom line and the organizational reputation as a service provider. Moreover, no one wants to identify themselves as a problematic organization to work with and lose money. However, before seeking to divest clients, organizations should consider the three tips to better manage unprofitable clients, as mentioned below:
1. Reassess the Relationship
Holistically assess your relationship with the client, considering factors aside from just profitability, before divesting. For example, is your client genuinely unwilling to spend more or simply unaware of all the services you offer? Have their needs changed over time, and if so, can you accommodate them? What about your own strategic focus — does it sometimes shift away from certain clients and make them feel unattended? Educating customers rather than dropping them may be more productive in such cases. In other cases, renegotiating the value proposition will create a win-win situation, benefiting you and your client equally.
Maintaining positive relationships with clients is no science; their satisfaction with your services relies on different factors. And you can control only some of them. So, assess whether you can manage an unprofitable client and revive a worsening relationship with a dissatisfied client. Or whether their satisfaction is out of your hands; if not, it's time to let them go.
2. Manage Expectations
“Managing expectations” is undoubtedly a buzzword in marriage counseling, but the same principles apply when dealing with unruly clients. From the get-go, clients need to be equipped with the right knowledge to navigate the possibly complex services or solutions you offer and understand the specific terms of their relationship with you. Ideally, you'd like to deliver this information during the negotiation phase, before even the contract is on the table. Both sides can establish and set expectations early on if you take the time to clearly outline how you create value.
Understanding customers' needs helps ensure that your customers expect and seek your product's features. However, you won't be able to propose the right product and reach potential clients if you misunderstand their needs. Hence, you and your organization should understand that the products offered help their business and add value. As an organization, you can also provide information or training to help customers better understand and use your offerings. Be sure to also discuss your relationship's limitations—clarify specific triggers if they tip the scales for you toward unprofitability.
3. Keep a Record
The ongoing nature of many projects can leave you susceptible to scope creep — and there are clients out there who either actively capitalize on it or simply aren't aware that they’re exceeding the project's original scope.
Of course, starting with a clear plan (see: “Manage expectations”) can help mitigate scope creep and project overruns to some extent, but you need to be diligent about tracking the details of hours worked and tasks completed for each project or client your firm takes on.
In the often-repeated “80/20 rule,” 80% of a business's earnings come from a small percentage (20%) of customers. Customers who don't necessarily buy a lot but don't demand a lot of services may be better customers than those who buy more but need so much assistance that they cost you. However, maintaining a long-term record of all interactions with a customer is the best way to evaluate its profitability.
Tracking project progress in real-time can empower you and your team to address potential scope creep and help you get ahead of it by communicating with your client as quickly as possible. Additionally, aggregating real-time and historical project data allows you to quickly compare actual data with estimates to know when you stray from projected costs or timelines.
An Effective Way to Manage Unprofitable Clients
Upon trying all these methods, if the company is still unable to continue with transactions in a manner that creates value for both parties, it should terminate the relationship. First, however, the company must deliver the news in a way that minimizes adverse consequences. Investing in a company's customer base is a strategic decision that shouldn't be based solely on profitability — the strategic repercussions are way too significant. Undoubtedly, deciding whether to divest will be one of the most challenging decisions of all. To remain competitive, you need to know what your customers are profitable for, how to serve them more efficiently, and when to change your relationship with them.
Understanding the commonalities between profitable and unprofitable customers is crucial for fostering beneficial customer relationships. Additionally, identifying your unprofitable customers with the most potential to become revenue-generating customers will help you determine which ones to retain and which to discontinue.
