We’re going to go out of business…but we don’t care if we do - this is what three partners said to each other when they went through their entire customer base and decided whom to fire. It was the end of their fiscal year and they were tired of doing business with some customers who were costing them money.
These were the following types of customers:
• Always complaining
• Always wanting a discount
• Late on paying their bills; not paying without collection calls; and/or notoriously 60 to 90 days or more late
• Consistently rude to their employees, and...
• In one case, the building that their employees visited, was unsafe
Once these partners finished making the list, they were ready to fire nearly 10% of their customers.
Value Your Service Enough to Say No
We’ve always been taught to honor the customer, but to grow as a business, you must understand your value. So, while this move made the partners nervous to do, they were resolute. And they fired them with “ruthless compassion.” What does that mean?
It means they met with each customer they were letting go and explained that they were not going to do their maintenance/service/projects in the upcoming year. They also gave these fired customers a list of potential companies as referrals for future work. The result – t
o their surprise, profits increased the following year. They realized that they weren’t spending time with unprofitable, draining customers, and they could spend time with profitable customers.
Now, at the end of every year, they review their customer list and decide who, if anyone, should be fired. Incidentally, the list was never as long as it was that first year.
The thing that surprised them was somewhere around the third year, several of the fired customers called to ask if they could come back. The owners agreed with these qualifications. They could return as long as they didn’t complain, paid their bills on time, and treated employees with courtesy. These customers realized how well this company took care of them and could not find another one who performed as well as they did.
Note: One more criterion to the list for firing this kind of customer – the customer is unprofitable. How do you determine whether a customer is unprofitable? Job-cost all their service calls, maintenance work, and replacement/projects
Here’s an example of a service call that is unprofitable:
Your technician goes to Mrs. Jones’ home. He inspects the home and finds a refrigerant leak. It takes three hours, and he charges $300. The service department’s gross margin is 50% and the overhead cost per hour is $60. The gross profit for the work your employee performed is $300 X 50% or $150. Your gross profit per hour is $150 divided by three hours or $50 an hour. Your overhead cost per hour is $60. You lost $10 per hour or $30 on that call.
Yes, the technician should have charged more than $300. However, many feel that $300 is a lot of money and won’t pay more. Also, most customers don’t put a value on time. Or, the customer may have complained about the price and was given a discount. Either way, it was a loss. Technicians must charge enough to have profitable service calls.
Use the same process to calculate maintenance profitability.
Here is the formula to calculate maintenance cost vs. profitability:
If you calculate that your company is losing $10 per maintenance plan and you have 1,000 maintenance plans, that is a $10,000 loss. If your net profit is 8%, then you must generate $125,000 to recover from that loss.
If you find that a customer’s commercial maintenance plan is losing money, then you need to determine what the price needs to be to break even and have a discussion with the customer. You cannot afford to pay customers to perform a valuable service for them.
Replacement/projects can be job costed as well. Where they become unprofitable is usually when crews take longer than estimated to complete the job. Or the customer complains about the proposal price and the price is dropped to accommodate and keep the customer.
One contractor handled this situation very well. He consistently found the same customer always asking for a discount. He discovered that the people in their procurement department got bonused on the discounts they obtained from customers. As a result of this discovery, he always added 10% to the proposal price. So, when the buyer asked for a discount, he gave them the 10% off. He got the price he wanted, and the buyer got the bonus.
If there is no way to make it profitable, that customer is costing you money. Never be afraid to fire unprofitable customers whether for repeated discounted prices, not paying bills, safety, or any other reason. It doesn’t make sense to keep a customer that you pay to do their work. Value your service and you will attract customers who do the same.
Ruth King has over 25 years of experience in the hvacr industry and has worked with contractors, distributors, and manufacturers to help grow their companies and become more profitable. She is president of HVAC Channel TV and holds a Class II (unrestricted) contractors license in Georgia. Ruth has written several books and has a new one hot of the press. Click Here to order. Contact Ruth at firstname.lastname@example.org or call 770.729.0258