Here is a question designed to test your business IQ: If you're given a choice between maximizing profits on a customer or maximizing customer satisfaction, which would you choose? The obvious answer is to maximize profits and customer satisfaction, which often happens. But that's not an option in this exercise. You have to choose either maximizing profits or customer satisfaction.
If you're looking to make a quick buck, the answer is to maximize profits. But if you're looking to build a long-term, profitable, growing business, the correct choice is to maximize customer satisfaction.
Let me explain.
A diverse customer base reduces risk in your business
If you have one customer and you will only have one transaction with them, maximizing profits is not a bad choice.
But most of us have businesses where we're trying to build a large, diverse customer base. Diversification in your customer base follows the same concept as diversification in your financial portfolio: you minimize the impact of losing one customer on your base.
If you have a business that's built around one big customer, what happens if that customer gets acquired or they fire you? It could easily put you out of business! That's why most businesses need to consider not only the Lifetime Value of a customer, but the customer's impact on your business beyond the revenue it generates.
Some of the other ways a customer can help your business include:
- Potential referrals that the customer can provide you.
- Testimonials, references and word-of-mouth validation that offers potential new customers a proof statement of your capabilities.
- Potential cross-sell and upsell opportunities that will generate additional revenue.
So in order to generate a large, diverse customer base, you have to nurture each customer to maximize it's utility to your business.
Maximizing profits could be counter-productive
Some professional services business try to squeeze every bit of profit out of each client in the short run. How do they do this?
- By assigning inexperienced account managers that don't have the depth of knowledge necessary to support the customer.
- By not responding efficiently to customer correspondence and requests.
- By limiting the time spent servicing the customer.
It's not hard to see how a customer that's receiving service as described above will not be a good source of referrals, testimonials and cross-sell opportunities. By shortchanging the customer to maximize short-term profitability, a business can shoot itself in the foot with respect to its long-term interests.
A good way to avoid these situations is to be clear up front as to what each parties expectations and responsibilities are. How many relationships are squandered when the consultant that sold the business disappears and the inexperienced account manager takes over?
While we don't advocate providing unlimited out-of-scope services to a customer, sometimes it makes sense to go the extra mile.
Not all customers are created equal
We've all had those customers that don't pay on time (or at all), treat you and your team disrespectfully and generally make the relationship tortuous. These customers can be a cancer to your business. And like a cancer, the best thing to do is to identify them as early as possible and cut them out.
But if you have a contract with a customer, you need to honor the terms of the contract professionally. Get as quickly as you can to a point where you can terminate the relationship and spend that time on your good customers and finding new ones.
Clearly, these are the types of customers form whom you're not going to do favors. Honor your responsibilities under the contract, unless your customer isn't honoring theirs!
The one thing that you need to address very early on is payment for your services. If a customer isn't paying on time, it's highly unlikely that they will in the future. Something inevitably will fall through the cracks, but if someone's always late, terminate your relationship.
My vendors expect me to pay my bills on time and I expect my customers to pay me on time. You can't run a business with unreliable cash flow and time is better spent chasing new customers than chasing unpaid invoices.
By providing a stellar customer experience to every customer, you likely will be maximizing your profits anyway. Make this your main objective and the revenue generally will take care of itself.