The efficiency focus of the past 18 months may well have added substantially to the risk profile of companies, while simultaneously reducing their profitability.
After all, efficiency for most means focusing on the largest customers – allowing one to reduce headcount (less people, managing fewer customers), reduce transaction costs (fewer, larger transactions) and, in many eyes, reduce risk (bigger customers are more trustworthy).
However, aren’t your biggest customers the ones that demand, and generally get, the best prices? Do your biggest customers not get the longer payment terms they request? Are your biggest customers really less work than others?
And what about the impact on your business of the failure to pay of one of your biggest customers? As we’ve seen, they’re far from invincible.
Conversely, most businesses will find that their smaller customers:
• Deliver better margins;
• Will pay more promptly (if for no other reason than you have more leverage);
• Are no more work than the larger ones, and often less so as they are less demanding;
On top of this, the impact of a failure on your business is far less severe, and you substantially reduce your overall business risk by spreading a given value across a number of customers, instead of concentrating it in one place.
What’s more, as business starts to pick up, the companies likely to grow most quickly will be the small ones – a 20% growth on $1 Million revenue is generally a good deal easier to find than a 20% growth on $1 Billion revenue. So having a good number of smaller customers will improve your growth prospects, too.
Analyse the true profitability (return on working capital, including all costs) by customer segment: you’ll find it a very interesting exercise.
I’m not for a moment advocating that you fire all your biggest customers, but rather that you not just focus on larger customers at the expense of smaller ones. As with all things in life, you need to achieve a balance.
Small customers should be embraced as much as large ones – after all, if you have a ready resource that will help you grow faster than the market average while improving your profitability and simultaneously reducing your risk, shouldn’t you make the best use of it?
A question that can easily be described as Catch22 can’t it?
I guess there’s a degree of Catch 22, but actually the benefits of not neglecting your smaller customers far outweigh the costs in my view.
I agree with your discussion in this article. Small customers are more likely to keep the business going in this still existing global crisis.
Of course, Governments also need to encourage the creation and development of small businesses as they are the job creators…
Whilst I would agree with article in general terms, a balance always needs to be achieved. In the drive for increased profits a tool, many companies overlook is their cost base.
Whilst companies control the costs of raw materials and other critical items, many ancillary areas get overlooked. The majority of businesses in my experience do not review utilities or waste management costs, very companies review bank charges.
It is our view that hidden revenue is contained in every company’s cost base. A saving of 4% of turnover is not uncommon if costs are reviewed correctly. This means that if company’s net margin is 8%, they would need to increase sales by 1/2 million to achieve the same increase in profit.
So to achieve balance companies should not only have a customer mix, they should balance cost management and reduction with the desire for increased sales.
Thanks for your comments, Ian. This was written, of course, when companies were undergoing extreme focus on efficiency and rapid cost reduction – generally with a short-term focus.
In less extreme times, I agree that cost management needs to be balanced with the desire for increased sales and, particularly in good times, companies neglect the cost-management side of the equation. It needs to be an area of focus at all times.