Profit is better than revenue! Unfortunately, many business owners and sales professionals either don’t know the difference or aren’t paying attention to profit. While it is a fact that all businesses need revenue, what they really need is good revenue.
If you’re thinking that all revenue is good revenue, there’s value in reconsidering that point of view. There is revenue that actually costs a company money. It could look like this:
John has a sales quota for the month, and his focus is on selling to as many customers as he can. As he networks and engages in sales calls, he is spending little time in discovery and a lot of time on persuading. All he cares about is closing those deals.
He makes his sales, but some of the customers are difficult. They’ve already drilled down on the price to a point where the margin is tight. Once the work starts, the customer is unhappy; they send products back and demand refunds and replacements. They are consuming everyone’s time. That basic revenue gain has turned into a major cost: time not spent on production or bringing in new business, refunds, replacements, and distractions.
Suddenly, that tight margin is in the negative. Too many of these types of clients can significantly damage a company’s sustainability.
When salespeople want to gain a major client so badly that they low-ball their bid, they are thinking about revenue instead of profit. A lot of people think a huge new client is ideal. However, when it takes most of the company’s resources without providing a significant profit margin, it can actually hurt.
No client should account for more than 20% of a company’s revenue. Salespeople should consider what would happen to the company if the customer left. The greater the share of revenue the client accounts for, the greater the damage to the company if they leave. All businesses need a foundation of midsize and small customers. That way, there isn’t a major impact if a client leaves or the company needs to “fire” them.
Whenever a company discounts its product or service, it runs the risk of hurting the company instead of helping it. Discounting sends the wrong message: that the true value of the product or service is the discounted price. It’s hard to ask for the true price once the lower price has been offered and accepted. Moreover, the company must ensure that it continues to provide outstanding service and products. The decision to reduce prices does not mean a reduction in the value of the offering; it does mean tighter profit margins, if not a breakeven result.
Profit is necessary for growth. It is that gap between revenue and expenses that allows a company to invest in itself, its people, its marketing and its offerings. That’s why thinking about revenue alone is insufficient. Sales leaders must think about the big picture and create a strategy to ensure that all new business provides a reasonable profit margin.
This strategy is not complicated; in fact, it’s pretty straightforward:
1. Define the Ideal Client
It is critical that businesses have a clear definition of what an ideal client looks like. An ideal client is one who values what the company offers, doesn’t beat up the company for its price, is cooperative and communicative, is pleasant to work with, and whose profit margin is reasonable.
Reviewing the current client base is a great way to identify the characteristics of an ideal client. The top 20% are the ones who possess those characteristics, and businesses can use them to create a list of what they want, and don’t want, in a customer.
2. Fire Clients
Once there is a defined ideal client, there is value in taking a second look at the current client base. Those clients whose profit margin is tight or nonexistent can’t be served successfully and need to leave. There’s a disconnect between what they need and expect and what the company needs and expects. Letting go of that revenue provides the business with the energy, time and opportunity to replace it with better revenue — revenue that includes profit.
3. Slow Down
Salespeople should take the time to do the necessary discovery when prospecting. Slowing down the process allows them to take an honest look at the prospect. Can the company really help them? Does it make sense for the company to engage in a business relationship with them?
4. Commit to Growth
Making a commitment to the business and to a minimum profit margin allows salespeople to walk away from harmful business without emotion attached. Every prospective customer engagement should include answering the question, “Does it serve the business?” When there is a clear decision about minimum profit margins, it’s a math question.
It can be a scary proposition to think about turning down business. However, it becomes easier when sales leaders think back to customers they didn’t like and to relationships that were more of a struggle than a partnership and take an honest look at their finances. If costs are higher than income, the revenue is not sufficient to sustain the business.
When a company makes room for better, more profitable business, it will appear. Conversely, the more low-to-no-profit customers a business has, the more it will find those types of customers. Since that pipeline is unsustainable, the lifespan of the business will unfortunately be shorter than hoped for.