Construction Today

Who’s the Best?

The preferred customers aren’t always the ones who appear to bring in the most revenues. In fact, it might be better for your bottom line to ‘fire’ them.

By Ken Sweet

Asked who their best customers are, most business owners will say they obviously are the ones who bring in the most revenue. The revenue generated is essential to keep the business a float and pay the bills and employee wages. But are they truly the best customers?

The old 80/20 rule, which says 20 percent of a company’s customers generate 80 percent of the profit, applies to construction companies. Yet, most business owners are unaware of which customers make up this 20 percent. And, contrary to popular belief, the big spenders are not always the best customers or even the most profitable customers.

Big Spender/Poor Customer

Companies that take the time to critically analyze customers and their business relationships might make some surprising observations. For example, the customers who appear to bring in the most revenues may in fact cost the company money, be difficult to deal with and use up too much of employees’ time. Don’t just study the bottom line – examine the entire picture. Ask:

• Does the customer continually request change orders or make other special demands, affecting labor and inventory costs?
• Is the customer always late in paying invoices, expecting preferential treatment or even discounts because the customer brings in a high volume or work?
• Is the customer demanding, difficult, disrespectful and/or rude?

The stress of working with these types of customers, along with the statistics that demonstrate their projects reduce gross margins, may be enough to encourage business owners to fire them. Then they can focus on those who are the true backbone of the business.

Sometimes the best customers are those who are ignored by virtually everyone in the business because they do everything right. They pay on time, rarely submit change orders, do not complain, hardly ever return inventory or cause labor delays, refer new business and continue to request new work. In other words, their business produces a higher gross margin. And, they might be more reliable than the big spenders.

Identify the Best Customers

The first step in identifying preferred or best customers is to determine whether the business made money on each completed job. Create a list of customers and, under each customer, list every completed job and the amount of revenue generated. Then categorize the customers by the amount of revenue generated for the company: less than 10 percent, 10 to 25 percent or greater than 25 percent.

This should present a clear picture as to which customers generate the most revenue. Examine those customers in the "greater than 25 percent" category. Did these jobs generate any change orders and cancellations? If so, calculate the costs associated with each of these to see whether it changes the generated revenue. Look at how they pay their invoices. Customers who pay in 30 days or less are more desirable than those that take 60 or more days. Customers who take longer than 30 days to pay are effectively borrowing funds from the business – at no interest – rather than paying the business for services rendered.

Finally, discuss the nature of the customer relationship with employees. Ask employees to assess the customer’s attitude to discover whether this is the type of customer with which the business wants to continue working. Continue this process with the other two categories to narrow down those customers who are truly the best fit for the business.

Focus on the Best

The best construction company customers are the ones who have been trained to be the best customers. Just like parents reward the good behavior of their children, the same principle applies to customers who support the business. For example, reward those who pay their invoices in full within 30 days with a small discount. Or, prioritize scheduling of jobs and labor based on the best customers. Customers who receive better service tend to be more loyal, less concerned about price increases and are more likely to refer other customers to the business.

Additionally, by identifying the best customers, businesses can concentrate their resources on them. First, this may lead to new customers or opportunities not previously realized. Second, the business resources can be used for those customers who will best assist the business with long-term growth and profit and not for those with the loudest voices. And, by knowing the characteristics of the company’s best customers, the marketing plan can target this specific audience – a better use of resources.

When to Fire Customers

Some customers are more trouble than they are worth. They may be too costly, too demanding or require too much work. In these instances, the business owner will need to say goodbye to customers who are too demanding or unprofitable. How does a business owner accomplish this task politely?

One idea is to raise fees to such a substantial level that the customer can no longer " afford" the company. Another is to write up the proposal or bid indicating the job will be subbed out. Either the customer will decide to pass on the proposal or, if it accepts the proposal, the business owner will not have to deal with the customer directly – the subcontractor will.

Alternatively, the construction company owner can be upfront and tell the customer the business relationship is not working and offer contact information for an alternative contractor. In any case, cut the ties before difficult customers drain the companys of more valuable resources and further erode profitability.

However, in some instances, companies can retrain customers they want to retain. One way to do this is by including financial penalty clauses in the contract to discourage and reduce change orders. In these cases, the contract language enables the contractor to add "premium" compensation to offset the labor costs incurred in effecting those changes. Also, offering small discounts for on-time payment of invoices will encourage prompt payment. Any customer who rarely takes advantage of such discounts should be considered for inclusion on the company’s credit watch list; this is a good indication of a customer who is cash-strapped.

Proposals and bids should incorporate the value-added services that are important to a customer. When the focus of the bid is on the benefit to the customer, the perceived value to the customer increases and assists the company in creating a "best customer" rather than simply a "big spender." And what can be better than best customers who become customers for life?

Ken Sweet is the executive director of consulting serices for IPA and IBA. For more information, call 847-495-6786 or visit www.ipa-iba.com.