As financial markets tighten, most business owners are looking for revenue anywhere they can find it. Unfortunately, there is such a thing as a bad client, and the mistakes you make now can have an immediate effect … and not a positive one. So, as you navigate the ongoing financial crisis, choose wisely. Don’t overpay for your revenue.
Some clients are just bad news. They beat you up on the price, and then they expect the world from you. They always pay late and won’t accept any penalties when they do. Your margins are razor thin … if you’re lucky. But, in a tough market, you take what you can get, right? Money is money, so you wind up kissing this client’s ass, rather than send him packing. This is your biggest mistake.
There are two problems with these problem clients. First, you don’t make any money on them. Next, because they never seem satisfied, you invest as much time as possible in keeping them happy. After all, an unhappy client is likely to defect to a competitor. If you are looking for a competitive advantage in this climate, let the bastards defect. Make them the competition’s problem. Here’s why.
You aren’t making any money on problem clients
Think about your worst clients. If you are selling a product or delivering a service, you have an idea of what your costs are. So, you know what your margins are-even if only ballpark-for each of your problem clients. Chances are your worst clients are paying you the least. If they are profitable, it isn’t by much. When you think of your overall operating costs-including leases, your time and the opportunity cost of screwing around with a problem client instead of pursuing new opportunities-you’re probably losing money on the relationship.
For businesses that provide a service, it is especially important to remain diligent. You may not realize just how unprofitable a problem client is. I ran into this when I had my management consulting business a few years back and more recently with my writing firm, j-knowledge, LLC. Your margins on a per-client basis seem sky high, because the only cost you have is your time, and that is based on the need to pay bills in your personal life. But, when you sit down to work on a project, you think: “I already own my laptop, and I have my knowledge (which is the major asset in a service business). I work out of my home. I have no other costs.”
Don’t be stupid.
When you are trying to keep your problem children happy, you are losing precious time that could be sunk into finding new gigs, developing marketing materials (which no entrepreneur spends nearly enough time doing) or even just enjoying some free time. If you aren’t making any extra money, you might as well enjoy yourself.
The Relationship Never Gets Better
Sometimes, you hang onto one of these pains in the ass because, at some point, you think things will get better. You assume that your client will see the value that you provide and eventually agree to higher prices. Or, the relationship will grow, and you can compensate for thin margins with volume. If you can handle that extra work yourself, your costs won’t go up. So, the work becomes inherently more profitable.
This never happens.
Over time, a problem client will drive your prices further down, not higher. You’ll be expected to do more for less and you’ll come to hate all your clients, not just the one that is making you miserable. But, you invest plenty of time in this guy, because you think you can change the relationship … and you’d hate to see him go to a competitor. Eventually, one of you will pull the plug, and nobody will be happy.
They Never Leave
Threats of leaving you for one of your competitors are usually baseless. If you are accepting barely profitable (or unprofitable) business, it is probably because several other companies turned the bastard down. If the prick threatens to leave you, suggest that he do so. He will do one of two things: (1) not find anyone who can deliver at the rates you’re accepting or (2) find some other unsuspecting service provider and become his headache instead of yours.
You are stuck with a problem client for as long as you choose. Ultimately, if you are working for rates that are not profitable … or are well below market … you’re in the driver’s seat, whether you realize it or not. Since you’re the one in control, you may want to take advantage of the position, before it costs you your business.
Sometimes, you just have to fire a client.
Fire a Client: It Feels Good
When I was a full-time freelancer, I realized value in firing clients. One in particular, was quite worthy. At first, all went well. I was providing a decent amount of work, and I was paid a fair price. But, pretty early in the relationship, the client started asking for more. So, I delivered and just added it to the invoice. The first time, there wasn’t much in terms of extras tacked on, so I don’t think the client noticed. My third or fourth invoice, though, was substantially higher, and my client hit the roof, accusing me of “nickel and diming” him.
I replied that if he wanted my time, he had to pay for it. I don’t mind wrapping some free time in for the good of the relationship (and I had), but he had to understand that my time had a value associated with it, and I was entitled to compensation. He pushed back, even expressing anger that I was the only one of his vendors that did not own stock in his company (it was an OTC penny stock). I explained that he had paid his vendors in stock, which is why they owned it. I asked why I should sink the money I earn into his company. He wanted loyalty; I explained that I was a hired gun. If he wanted loyalty, he should have hired employees instead of contracting with outside companies.
Somehow, we pushed through it. But, we were on shaky ground. He was late on an invoice. He wasn’t terribly late, but I knew his habits and decided to push hard. I had heard too many rumors of people not getting paid. Eventually, he delivered, copying his entire community of vendors on all our correspondence, which became acrimonious at points. To save face, in his last e-mail he mentioned-to everyone-that he understood my position, because we hadn’t been working together long, we didn’t have a track record with each other. I responded that he had pushed back on almost all my invoices, and I cc’ed the world. (I heard off-line from several people that they had wished they took my approach, as they were owed thousands of dollars).
Yet, we got through this, too. He asked me to do another project for him. It would have been substantial and taken up most of my month-keeping me from working on other projects. I quoted my going rate, and he balked, asking to pay about 10 percent of that amount. I’d had enough. He explained, “I love the work that you do, but I can’t afford those prices,” referring to a proposal I’d issued. I replied, “Some people want to drive Ferraris, but they can only afford Camry’s. Guess what’s in the garage.”
At that point, I fired the guy, and I didn’t look back.
And, if You Don’t …
You’ll regret it. No names, but I am aware of one services business here in New York that had several problem clients. The clients had recognizable names, which was a source of great pride to the management. Of course, the relationships had little marketing value, as the firm was unable to divulge that it worked with these prestigious companies. So, the issue really came down to ego.
Right away, there was a huge problem. The markups on the business provided to these clients were well below the market average. Further, the company provided a high volume of its service to these companies, which caused these relationships to occupy a disproportionate share of the firm’s in-house resources. Essentially, they took more from overhead than they contributed to paying for it. And, they were slow to pay. So, the company had to rely on credit, which increased its costs. If these relationships were profitable, I’d be shocked. Most likely, they were maintained at a loss.
Now, the firm is suffering through layoffs and can’t figure out the real source of the problem. They’d be in great shape if they focused on growing profits instead of top-line revenues and fired clients early.
Roll the Dice if You Choose
It’s easy to let fear run your business in this environment, but it could cost you money in the near term and the long term. Now is the time to focus on your best clients, not your worst. Evaluate your business carefully, and don’t be afraid to make the hard choices. They could be the decisions that save your business.
Have you ever fired a client? Leave a comment about it or shoot me an e-mail (email@example.com). I’d love to hear about it. No names are necessary.