SmallBizResource Blog -- Business Know-How

Target Profitable Customers

Posted by Janet Attard, Courtesy of Business Know-How Thursday, Nov 13, 2008, 09:27 PM ET

Once your business has established itself by selling to small companies or stores, it's tempting to want to go after the big fish in the sea. But those big-fish customers aren't always as profitable as you'd expect, and sometimes are more trouble than they are worth.

If you play the game right -- and have the cash flow and infrastructure to manage really big clients, yes, they can often be very lucrative. But sometimes those big-name clients are a lot more trouble than they will ever be worth to you.

For starters, the bigger the company and the bigger the order they are placing, the deeper the discount they're like to be looking for.

Now, if you quickly run some numbers through your head, you may think it's in your best interest to give a steep discount for very large orders. Heck, if you bring in $2 per item selling 50,000 items to a single company, it adds up to the same $100,000 you'd make if you sold 10 different companies 2000 items each at $5 an item.

And sometimes there is profit in scale.

But not always. Take a closer look at that big company sale, and you may find that the big company pays in 90 to 120 days instead of the 30 to 45 days it usually takes to collect from your smaller accounts. Meanwhile your suppliers and your landlord won't wait 90 to 120 days to get paid from you. If you don't have enough cash to pay your bills until you collect, you'll need to borrow money or factor your receivables. Either option will add to your costs and cut your profit.

The big company may demand a lot more service than smaller ones do, too. It may want you to redesign a stock item to meet its specifications, a cost it expects you to bear as part of the very reduced price it is expecting you to offer. Or it may need to be shipped in a certain way, or have inventory control tags or bar coding on it.

Then, too, is the bulk of time devoted to the bidding process to win contracts with big corporations or government agencies. Putting the bid package together may take you and your team a significant amount of time. And, unknown to you, that time could be for naught if the purchasing agent already has his mind set on a favored vendor but is required by company policy or state or federal law to get a certain number of bids before awarding the contract.

Despite the potential for problems, some big customers really can make a serious improvement to your bottom line -- and your reputation. To determine whether it makes sense for your company to pursue big contracts, run the numbers. Some factors to consider:

• Start by determining all of your costs for bidding on and delivering on big contracts. Include the cost of your time and your team's time to prepare the bid.

• Determine what your cost of goods or inventory costs are at different volumes.

• Know what the packaging and shipping costs would be; being sure to include the hourly cost of the employees needed to pack and ship the goods and the actual cost of the packaging and labels.

• Determine whether your company would have the manpower and equipment to get the big order out on time -- and without interrupting service to your existing customers.

• Take a very close look at your cash flow. Can you afford to lay out a lot of cash to fulfill a big contract and then wait 90 to 120 days to get paid? And, if not, will the contract still be profitable to you if you need to borrow money or factor receivables? Check the interest rates and be sure. Then, when you have all the numbers in front of you make the bid or no-bid decision.

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