An Indispensable Role
Last month we introduced the idea that your business has three critical components in order to succeed. First on the list - profits. Without profits, your business stagnates and dies like a flame with no oxygen. When you subtract costs from income, then you have profit.
I can’t think of a viable business model that doesn’t involve a customer in one fashion or another. Even bureaucrats consider their constituents to be customers, similar to a tick calling a dog a customer. Without customers, you have no income, so this month we will explore the indispensable role of customers in your business.
If your childhood was like mine, you had opportunities to do school fundraising by pushing cookies, fruitcakes, candles or whatever else the promoter could contrive. It’s easy to tell when fundraising season is upon us as youngsters wander around with note pads and catalogs while grown-ups practice the art of averting eye contact with the little hucksters. These young salespeople, at least the successful ones, understand that after shaking down Grandma and Uncle Louie, they are going to have to hunt down real customers - customers with different last names.
After picking the low-hanging fruit, they begin their quest for more customers, preferably easy marks such as fellow church members or their parent’s bowling league. This is where the budding salespeople ease in to the concept of shaking off rejection. Those who catch on to the idea that “no” doesn’t mean “I hate you and you smell bad” will be able to step up to the greater challenges of door-to-door sales, where they will be lucky to make a deal one out of 10 times. With that experience, and steeled to the pain of rejection, they’re ready to set up a table in front of the Wal-Mart where the rejection rate is practically incalculable. They realize that gaining customers is a numbers game and the bigger the numbers, the better their chances to find customers.
Numbers MatterIn our fundraiser analogy, we reveal several types of customers, but unless Uncle Louie hits it big on his gas lease, the Munchkins who win bicycles will be those who corralled the most customers. The head count matters for several reasons. Let’s say Uncle Louie does, in fact, sign a lucrative contract on the gas deposit under his home. While he is celebrating his good fortune, his darling niece, whom he sees at least once a year, happens to knock on his door. She walks away with an order for five dozen of every variety of cookie she had to offer. He has his holiday shopping complete and she has more time to spend Twittering or managing friends on Facebook. She easily wins the grand prize in the fundraiser for having outsold everyone in her class.
The downside to this windfall won’t show up until the next fundraiser. By that time, Uncle Louie, feeling rich from his gas revenue, will have bought a boat, which turns out to be a 20-foot hole in the water in which to toss money. Our little “sales champ” may touch him for a box or two of cookies, but this year she’s going to end the contest dead last. The industrious sales kids she had previously beaten will capitalize on the customer base they laboriously built up. Some of those customers will drop off the list, but they will be replaced with new customers.
The important point to note is that basing success on a single client is tantamount to giving them control over your business. No Uncle Louie, no business.
For some contractors, Uncle Louie may be an industrial account that provides a large percentage of overall revenue. It’s easy to get lackadaisical about customer acquisition when you can always count on your overhead to be covered by Uncle Louie. But you can’t count on Uncle Louie forever.
If you suspect your business might have an Uncle Louie or two, here are a couple of tests you can perform. First, simply consider what would happen to your business if Uncle Louie closed up shop and moved away. Would it mean idling a truck or two? Would you have to let a few employees go? If this is as bad as it gets, your situation may not be too risky. But if you’re still paying on those trucks, will you be able to cover their expense while you search for enough customers to replace Uncle Louie? The more fixed overhead you have that is relying on a single client, the more at risk you are.
Here’s another test: Typically, big clients build up big receivables. How much money does Uncle Louie owe you at any given time? As long as the big client is healthy, the receivables may not be a problem, but what would happen to your company if you lost the account and had a problem collecting what he owed you? Now, instead of having to adjust overhead, you’re having to make up a shortfall of revenue. How much can you afford? How long can you wait?
For either test, the solution is for Uncle Louie to have a smaller slice of your business. This does not imply that you should call up Uncle Louie and explain that you’re going to have to cut your service in half so it will be in balance with the rest of the company. Instead, you need to do what our cookie sales champ should have done: get more customers. As you grow your customer base, Uncle Louie becomes less critical to your survival.
There may even come a point where you can bravely tell Uncle Louie that it’s time to raise prices because he’s not as profitable for you as everyone else. Obviously, you don’t want to lose Uncle Louie nor do you want to lose any customer, which brings up another point.
In our analogy, every cookie purveyor began by tapping the most accessible clientele. They then began broadening their outreach. Gaining those new customers was hard work. As we saw, over the short term, all that hard work was easily beaten by one Uncle Louie. In the longer view, the expanded customer base made the effort worthwhile because the repeat customers came back for more. We need to look at the value of a customer more closely, because too often their important role in business is taken for granted.
Once you get past friends and family, finding new customers begins to cost time and money. The less time you have, the more money you’ll have to spend for each new customer. Have you ever worked out the math to see what one new customer costs your company? This cost is important for a couple of reasons. First of all, as we saw in our cookie sale, it’s easier to sell to a repeat customer than it is to find a new one. If you plan from the very beginning to have a long-term relationship with each customer, then your initial investment pays off with bigger dividends. Repeat customers are also excellent resources for referrals, further reducing your cost of customer acquisition.
The second point about cost of acquisition is that this budget item is often neglected. You can be the best contractor on the planet but if people have to find you by accident, it’s very likely that you’ll be lonely. Like it or not, you or someone you designate must be actively involved in the acquisition process.
Besides working on the mechanics of getting the calls to come in, it’s important to tailor messages to improve the likelihood that the new customers will be a good fit for your company. All this takes effort. It takes commitment. And it takes resources. Your level of commitment to this leg of the business triangle will directly affect the success of your company.