It happens to all of us at some point in our promotional products career: you finally convert that hard-to-reach prospect into a bonafide customer … only to watch them mutate into the dreaded all-consuming-client.
You know the type: Constant cost comparisons. Always looking for a “deal.” Too much hand-holding. Slow pay. Never quite happy with the outcome.
Emotional vampires, they suck the life right out you.
And then it happens, and the clouds part. You land a dream customer: fat margins, easy to work with, understanding when mishaps happen (as mishaps will happen), and pays on time.
Someone pinch me, you think. If I could only get more clients like this!
You can.
But you must steel your mindset: You’re in business to make a profit while enjoying your work. Period. Those two principles are not mutually exclusive. Making a profit usually has a direct bearing on the fun you’re having in business.
Ready to start enjoying work again?
Here are eight no-nonsense principles of profitability, principles that the pros had to figure out the hard-learned and hard-earned way, principles that will protect your bottom line, maximize your profit, and bring your mojo back:
Most distributors know their average margin, but few analyze their average margin by client. Think of every client as a small business unit.
If you drop your margin to land an order with Client A, you need to make up for it elsewhere on another project. Analyzing your margin by the client makes you aware, it informs how you will sell to that customer in the future. Profit is the fuel in your economic engine, to ensure you don’t run out, you must habit yourself to regular reviews of profitability: by month, by quarter, and by customer.
Establish a low margin, minimum threshold, a line in the sand that that states, “we’ll go no lower than _____% per order.” Sometimes it makes sense to go low, for example, you might have a big order opportunity with a reliable customer and a trusted supplier. But establish a standard and do not dip below it.
Most importantly, filter each opportunity through a risk assessment. Too many distributors are too quick to drop their margins to land a big order without a buffer to recover from the possible loss. Rod Brown, CFO of MadeToOrder, a $25 million Bay area distributor, summed up the difference between adventurous risk and reckless risk, by sharing his story about a $300,000 loss (audio clip is 2 minutes):
It is crucial you understand that there is such a thing as too low. What’s the lowest? That’s for you to decide. One distributor summed up their minimum margin this way, “under 25 points makes no sense at all.” We can’t suggest what your low threshold should be but have one and stick to it, even in the lean times.
Distributor RIGHTSLEEVE has a minimum first-time order threshold of $2,500. Sound too steep? When you consider the downstream cost to your operation to on-board a new customer (the time, energy, and risk), you’ll realize it’s not steep, it’s a protective mechanism. A minimum first-time order threshold keeps new colleagues from chasing bad business when they’re hungry. It keeps their focus on the right kind of business. The first-time order threshold exists as a yield sign; it makes you pause and assess the client opportunity. You might decide to take a $500 first-time order with a client who has significant potential, but if you take that order without sizing up the annual spend opportunity, you’ve lost money on that order before it goes out the door. A high entry point ensures you protect the integrity of the types of clients you serve, establishing a baseline for working with only profitable customers that represent real future growth potential.
We often get stuck in the habit of quoting the same margin to a customer. Yet, some customers can increase their demands or services with you, but because you’re afraid to lose the business, you stick with the same margin. The result? Your operating costs escalate and your net profit declines.
Or, perhaps you’ve improved your services to a customer. They love you and sing your praises. Are you reaping the financial reward for your well-earned praise? Incrementalism is a way to raise prices without risking concern. 1% or 2% average margin increases are hardly noticeable, and it is a fantastic way to gradually add profit back to your bottom line.
This example will vary by distributor, but a quick straw poll among friends revealed that their minimum threshold of annual sales potential required for all customers is $10,000-$20,000 (this is for drop-ship customers with no additional TLC).
It’s tough to predict what a client will spend, but a minimum annual sales requirement will help you onboard the right kind of customer, particularly customers who know or can approximate their annual budget. A minimum annual sales threshold also helps protect your time, ensuring that the investment you make in each client pays dividends: the more you know about a business, the more potential you have to grow that business. If you serve hundreds of clients with low annual sales volume, your ability to consult, analyze, and help each customer is negligible. Establish a minimum annual sales threshold so you can focus your expertise on clients worth your time.
What’s your ideal book of business? 20 x 50? Twenty customers, who spend $50,000 each with you annually? 50 x 20? Fifty customers, who spend $20,000 with you annually? Determining your ideal book of business can establish you on a path to better prospecting and build your backbone for firing substandard customers.
Moreover, focusing on an ideal book of business keeps you from chasing small projects for small customers thereby fragmenting your customer base. For every “easy order” you take with a customer that does not have the potential to fit into your ideal book of business, you are losing time that you could invest in growing existing customers. Determine your ideal and dare to dream big. If you dream big, you’ll aim big, and eventually win big.
Firing a client is tough, but the pros do it for a crucial reason – opportunity costs. For every low margin, high maintenance client you squander your precious time on, you forgo the opportunity to work with a better customer with healthier margins.
When reviewing a customer’s sales, remember that gross sales and gross profit are only two metrics. Another important metric to look at is the number of orders processed in a year (to determine your average order size). Review average order size once a quarter or every six months alongside your YTD sales and profitability. If you find yourself working with a low margin, high maintenance customer, either work diligently to improve or let them go.
Sometimes, the only way to make room in your busy calendar for profitable business is to eliminate the unprofitable. Establish a six-month review with all of your customers and ask where they fit on the profitability matrix below:
Opportunity cost is the least understood yet most important principle in a salesperson’s growth. The pros don’t just believe the proverb “time is money,” they live it and make hard decisions by it. To paraphrase Dan Ariely: Money [time] is all about opportunity cost. When you spend money [time] on something, that’s money [time] you can’t spend on something else.
In Jim Collin’s monumental book Good to Great, he explained how to arrive at your Hedgehog Principle, your “one big thing” that differentiates you and makes your company great. He suggests you ask three simple questions:
What can you be best in the world at?
What drives your economic engine?
What are you deeply passionate about?
In the answers to those three questions, you will find your best clients; they will be healthier margin customers who you enjoy working with and customer who enjoy working with you. For every customer you serve, ask if they are the “right fit” for you. Determining “right fit” builds a longer lifetime customer value and puts “fun” back in the word “work.” It also ensures you work with customers who respect your value proposition and it prevents you from chasing low margin business.
Warren Buffett once wrote that he and his business partner Charlie never learn how to solve difficult business problems, they learned how to avoid them. He credited their success with their ability to identify one-foot hurdles they could step over, rather than their ability to clear seven-footers.
Principles of profitability are your one-foot hurdles. They are not opinions; they are guiding principles that you can apply to your business to fuel your growth and give you back your joy in entrepreneurship.
Have any profitability principles you’d like to share? Email us!
This post is Part VII in our series “The Path to $10 Million.” Previous posts include, The #1 Training Method for the Promotional Products Industry, Unvarnished and Unconventional: Bold Ideas on How to Build a Better Promotional Products Support Team, 4 Mistakes to Avoid When Hiring Promotional Products Salespeople, 7 Questions That Help You Focus and Find Your Personal Path to Success, 3 Critical Roles in a Promotional Products Distributorship: The Architect, the Sales Driver, and the Nurturer, and The 5 Stages of Business Growth.