When Customers Don’t Fit
Tom Crowley, CEO, MBX Systems
No one wants to turn customers away, but sometimes it’s the best path to growth. If customers fall outside the scope of your core competencies or otherwise place a burden on your resources that is disproportionate to the payback in profits, trimming the customer base – as painful as it may be – can help get you back on track.
I learned this lesson a few years ago when we calculated that 85% of the revenues of our technology business were generated by 15% of our customers. Since smaller customers and those outside our core vertical markets required as much time and effort to service as our main revenue generators, we decided to reallocate our resources to focus on larger order volumes and specific vertical sectors. That meant cutting 65% of our customers loose.
Since the switch, our revenues have nearly doubled, revenue per employee has jumped 32%, net profits and average customer size have more than tripled, and the revenue generated from our top five customers has quadrupled – in part because we are able to service them better than before. We have fewer customers, at least over the short term, but we’re on a stronger growth trajectory.
It’s the old story: no pain, no gain. If you’re considering pursuing this path, here are a few guidelines to do it both intelligently and gracefully.
1 – Be willing to change your business model
Businesses evolve. Market realities change. Startups in particular begin with one business focus and frequently need to shift to another as customer needs become clear. Doing a deep dive into your customer metrics can tell you if you need to redefine your target customer or pivot to a different business model altogether.
In our case, we were building custom servers for customers in upwards of 40 vertical industries. After analyzing our business database, we not only elected to concentrate our efforts on larger customers but also narrowed our target vertical sectors to key markets in which we already had significant penetration and engineering expertise.
This allowed us to take advantage of economies of scale in manufacturing, avoid spending excessive engineering time for customers with limited revenue potential, and provide complete support services – including re-engineering platforms to replace obsolete components – while still preserving profitability.
2 – Give departing customers a grace period
Ending a relationship with any customer is tough. Companies invest substantial time, money and manpower to acquire new customers, and fight hard to keep them away from the competition. You need to break the tie gently, both out of respect to their businesses and to maintain your reputation in the marketplace.
At MBX, we did this by informing customers on our target list of the change in our business strategy, giving them six months to shift to new suppliers in order to prevent disruptions to their operations, and facilitating connections with alternative suppliers. We also gave them an incentive to switch by imposing fees on previously free services for those who failed to meet our new minimum order requirements or preferred vertical markets.
These strategies resulted in a smooth transition and – as far as we know – no hard feelings.
3 – Get your business development team on board
From a business development perspective, changing customer parameters or business models involves two challenges. The first is to diplomatically eliminate any prospects in the pipeline that fail to meet the guidelines. The second is to communicate the new policies to ensure that sales efforts will fit the revised business plan.
This can work even if you have substantially narrowed the net that your team can cast in looking for customers. In the first year after my company decided to increase target revenue volumes and limit customers to specific industry sectors, for example, we logged a 90% increase in new business.
The same principles apply to companies of all kinds. Analyze your customers. Figure out what’s inhibiting growth or profitability. Find your sweet spot. Change if you need to. If that means winnowing your customer base to build your business faster as well as increase your margins, so be it. It’s not a task for the faint of heart. But then, neither is the job of growing a company.
About the Author
Tom Crowley is CEO of MBX Systems, a leading designer and manufacturer of application-optimized server appliances and cloud-ready solutions for independent software vendors and service providers worldwide. www.mbxsystems.com