If you’re behind on your bills, first thing you do is cut expenses. That’s not the only place to start looking. There’s another place the cash goes that few ever investigate: your customers. Customer strategy is simply looking at the true cost of running each customer’s business with you. Time for a reality check: if you’re selling your goods or services to a customer and you’re not making a profit on it, you’re not a business owner. You’re actually working for your customer.
Looking at customers like this helps you think about your business for what it is. You’re in the business of making money. You’re not in the business of trying to please every customer who walks through the door. Who you keep, and what you spend on them, has a huge impact on your cash flow.
Audit Your Customers
So where do you start? With your own numbers. Compare sales volume to number of customers you spend time with. Also, compare number of transactions against average sale per transaction. If your ratio is high and your margins are low, you’re giving away the bank. It’s time to audit your customers. Customers cost you money, too, and as a business owner, you owe it to your profit (and your sanity) to identify them as such.
There are five steps to it. The first is segmentation: putting the customers who are known for taking advantage of you on fewer, or cheaper, resources. Or you provide different levels of service to different customers, at the level they deserve, versus the price they expect.
The second step is measuring each customer’s margin. This is so you can compare the margins for each customer and see which ones are worth it and which ones aren’t. Step three is tracking your customer’s life cycle, meaning from start to finish and all the way through the end. This is also known as lifetime value (LTV) of a client, which is something worth watching. The fourth step is managing customer impact: what would your business look like if you didn’t have this customer? Would it affect your business if you lost this customer? While every customer is valuable to your bottom line, not every customer is equally valuable.
Fifth and most important, measure customer profitability itself. Here’s how it works. First, put your clients in different groups depending on how you service them. Sort them into different buckets based on their sales volume and how many transactions they conduct. Next, for each group you want to subtract out your estimated relative cost to service from your revenue. What’s this mean? The customer only gives you a certain amount of revenue, and it costs you X to service them. That tells you which customers to start cutting, which ones to focus on, and where your people’s time is going.
Time to Cut Them Loose
But put the math aside for a minute and think about the relationship itself. Are they rude to your staff? Do they complain a lot? Do they put off payments, or expect special treatment at a bargain price? If your customers are taking advantage of you and your services, it’s time to cut them loose.
I know what you’re thinking: why would you ever do such a thing? Why would you let money go out the door? Because a customer who eats up more time than your profitable customers is costing you money, not making it. Letting them go frees up the time, money and staff for your more profitable customers, and frees up your mental energy. You’re not focused on a customer that costs you money anymore. This isn’t a strategy for squeezing every penny out of a deal. It’s about identifying profit centers and helping you focus on the customers who will make you money.
Not sure who these customers are? Talk to your operations people. They know. Take the customer who calls on a Friday afternoon needing an order rushed out by the end of the day. To get it out the door you pull extra workers off of one of your regular operations and hustle it out to be processed and sent out. It’s a costly inconvenience. Unless you charge a premium for rush orders, that customer is less profitable, because they eat up more resources.
Then there’s the customer who is always slow to pay. Your A/R clerk has to make several phone calls to make sure they pay their money when it’s due. Then they want the invoice sent again, because they “lost” it. That costs time, and time is money. It also causes cash flow issues for you, because the money you’ve already earned shows up late.
And then there’s the customer who only orders in small batches. If your process needs setup time for every order, a smaller order costs more to process. So every time you have to run a set up or send them a batch it costs you more to fulfill that order. If you don’t charge a premium for smaller orders or build this in to the order, this customer will be less profitable than the large orders.
A rush job, a late check, a small run: it’s not a big hit if it only happens occasionally. But when one customer keeps doing it, those costs add up fast. These costs don’t come into play for every customer that takes advantage of you. But if you don’t discover them, or worse yet, don’t act on them, you may as well be working for them.
Weeding a Garden
Think of it like weeding a garden. If you do things as they come up, you have the little time it takes every now and then, when you’re done with other work. If you don’t, and the weeds overtake the garden, every time you have to go back and pull them out it costs you more and more to clear them up again. On top of that, the weeds will take over the entire garden if you let them. And a crazy-weeded garden means a lower yield every year, because the weeds rob the plants of the nutrients they need.
Your profitable customers are the plants. Keep measuring, act in real time, and put more of your resources into them instead of the weeds. And it’s my belief you need to identify profitable customers and stop relying on the customers who cost you money. They’re out there, and they’re worth the effort.
If you’re already behind with lenders and vendors in 2026, every dollar a bad customer stops draining is a dollar that can go toward the debts in front of you. Remember, you are in business to make money, not to serve unprofitable customers at the expense of your business.
