Not all customers are valuable to your business. At some point in your career, you have probably found yourself saying, “There’s nothing we can do to make them happy.”
At that point, you likely found yourself spending countless company resources to please a customer that could not be pleased. The way you measure a customer’s true value to your business is to grade them.
What factors should you consider when grading customers? Here are my recommendations.
- Payment terms. Have you heard the term “5th 3rd Proxy?” If you haven’t, it’s time to familiarize yourself with it. 5th 3rd Proxy are payment terms, and more and more customers are asking for it. If you agree to these payment terms, your customer will pay you on the fifth day of the third month after they have received your invoice. On average, business that agree to this can expect to get payment about 110 days after date of invoice. I’m not willing to wait 110 days for payment, and neither should you.
- The Golden Rule. When we were young, we heard it over and over from mom and dad: “Treat others the way you wish to be treated.” Well, The Golden Rule should apply to your customers, as well. Because they pay you money, some customers will yell, use obscenities and even threaten you. If you live your life by The Golden Rule, then you deserve to be treated with the same dignity and respect that you give to others. If you are not, the customer may not be worth keeping.
- Gross margin. For each and every one of your customers, you should know what your target margin is. If you are unable to achieve your target margin due to mistakes you are making as an organization, then correct those mistakes. If you are unable to achieve your target margin because the customer is unwilling to pay the price point that will enable you to do so, then you should consider dropping that customer. Margin is what enables you to successfully deliver the product or service that the customer requires.
- High maintenance. If a customer is high maintenance, chances are that you are allocating too many resources to that particular customer and neglecting others. High-maintenance customers are demanding, and while some are worth it, some are not.
- Getting started. Create a scoring matrix (I recommend using A, B, C and D, similar to a school grading system). Know your Mendoza Line. For example, “If a customer scores two Ds or more in any of the rating categories, we will drop them as a customer.” The recommended frequency for grading a customer is annually, to be done 90 to 120 days prior to the renewal of your contract or purchase order.
Before committing to grading your customers, you must have the courage to drop them if they fall below your Mendoza Line. If you are unwilling to do so, then the process of grading is a waste of your valuable time. Remember, If you can measure it, you can manage it, and the value a customer brings to your business is measurable. ●
Dennis W. Lejeck is Founder and President of Black Knight Security