Your Best Customer Is Costing You Money

Is that feedback? It is, yes, especially to our listeners out there. John is not wearing a hat. And he's bushy bearded this week.

All righty, shall we get to it? This is the episode where we kick a sacred cow right in the chops. Tell us about it. Yes.

All right. Well, again, folks, composite story. Every detail is real, but it's the whole thing.

So, five million dollar marketing agency. Owner had a flagship client at 30% of revenue. Three years in, calls them his best account.

On paper, biggest revenue line, oldest relationship, name on the website. And then we ran the margin analysis. That account was at 18% gross margin.

You know what's wrong with that? The shop average was 38. 20 points lower. Every other account on his books was subsidizing this trophy.

His team was burning out on that one client's rush request. He was hiring against capacity the customer was eating. His biggest customer by revenue was his worst customer by profit.

He had no idea. The CPA never told him. The bookkeeper never told him.

The marketer was busy changing new logos. And the salesperson was protecting the relationship. Nobody owned profitability per customer.

So, nobody knew. Wow. Wow.

And full disclosure, my marketing agency is a customer, but we're not talking about us. Glad you brought that up. Yeah.

Are we? Maybe I just don't know. We'll have a different question and answer episode for John's agency. Yeah.

It seems basic though, but why don't owners know what their biggest customer's margin is? It's because their accounting system is built to file taxes, not run a business. Those are different things? Very, very different things, John. Alrighty.

Well, let's dig in a little more. Why don't owners know this already? What's going on? Because nobody made them run the math. Their CPA does taxes.

Their bookkeeper does data entry. The default P&L gives you one big revenue number and one big COGS number, cost of goods sold for those out there. It's beautifully averaged and it's beautifully useless.

To see margin per customer, you need books segmented by account, hours tracked against jobs, true delivery costs loaded in. That is financial intelligence work. Most businesses haven't built it.

So owners fly blind and assume the biggest revenue line is the biggest profit line. It almost never is. And there's a softer reason.

They don't want to know. The trophy account is part of their story. Running the math threatens that story.

If you have never run a customer by customer margin analysis, you don't have a customer strategy. You have a customer mythology. That's right.

And speaking from experience, without customer reconciliation and understanding how much time, you've got no idea. You really don't. Especially if you've been in a multi-year engagement where with a large client, you say, hey team, make this customer happy.

There are things that are seeping out of the cracks that you have no idea that they're spending the time doing it. It's all about math, right? That's what you just said at the top of the segment. So Ryan, walk me through the math.

If I sit down tomorrow to do this, what do I do? Pull your top 10 customers by revenue. Just 10 of them. Don't try to boil the ocean.

Just take the top 10. Use your trailing 12 months of revenue per customer. Real easy.

That's the line they're proud of. That's your trophy. Then load the real cost against each one.

Direct labor hours. Materials and subs. Travel and after hours.

Overtime. Rework. Warranty calls.

The discount they negotiated off rack rate. Don't forget the soft costs. The dispatcher spending an hour a week managing their account.

The CFO chasing their AR every month because they pay at 75 days. You taking their call at 9 p.m on a Sunday. Those are the soft costs that you need to look at.

Compute the gross margin per customer and gross margin percent. So it's your sales minus your costs. Your soft costs.

That gets you gross profit. Then you divide that gross profit by your sales. Then you sort it by percentage, not by dollars.

By percent. That's the most important part right here. The order will not be the order you thought it was.

Sometimes the biggest customer is in the bottom third on margin percent. Sometimes you find one paying 15 points below your shop average. That's got to be the moment that you realize that you've been running a charity for your biggest account.

Quick break John. We're at the midway point. I want to note that you have not yet made a Canadian joke.

I was saving it for this read. Of course you were. Brought to you by Leavitt Electric on the Seacoast.

Licensed in New Hampshire, Maine and Massachusetts. And the tie to this episode is the renegotiation conversation. Most owners avoid it the way most homeowners avoid calling an electrician about that one outlet that mostly works.

Oh yes. As a Canadian I have a deep respect for people who fix the thing before the thing burns the house down. I will not be explaining why.

That's your one. That's my one. Point is fix the loose wire before you cost you the house.

And renegotiate the underpriced client before it costs you the business. Leavitt Electric, Dover, New Hampshire. Find them at leavittelectrical.com. Up to code the first time.

Same energy. Same every episode. So let's dig into some real examples.

What does it look like outside the agency story? So the agency, the trophy client at 18% margin, shop average at 38%. We renegotiated. We didn't lose the account.

We brought them up to 27%. So that was a huge difference from 18% to 27%. They had the same revenue but they had $86,000 of additional annual profit just from one conversation.

The client didn't push back hard. Now let's take an HVAC operator. Emergency calls felt heroic.

The team loved them. They ran at 14% margin after callbacks and then warranty work. Warranty rework.

You got maintenance contracts. The boring ones that nobody bragged about. Those are running at 42%.

Not 14. 42. They're chasing the lower margin work because it felt exciting.

Heroism doesn't pay. Maintenance pays. The customer window treatments.

Owner pushing shutters because the per unit price was higher. Margin on shutters 42%. Margin on shades.

The commodity product she discounted 61%. That's a whole lot of numbers. But the gap was $144,000 of pure profit that was leaving the table.

Different industries. Same blind spot. Same fix once the data is on the table.

Those are red flags. You should be able to see those red flags without having to run the full analysis. How do you spot those? There's usually five of them, Jon.

Three of them usually land on the biggest account. Five signals every time. One, they negotiated heavily up front and the discount never came back.

The founder gave it to them in year one to win the logo. Nobody ever revisited it. Number two, they're slow payers.

30 days goes to 40 to 60, 75, 90 days. Every day past terms is your money funding their float at 0%. You're giving your best customer a 0% interest loan.

Three, they demand rush jobs at standard pricing. Or worse, they call it a partnership. Nine o'clock at night, 9 a.m. Doesn't matter to them.

They want the same pricing. Does that give you the same cost? No. Four, scope creep is constant.

Hey, can't you do that? Hey, won't you throw this in? You know, once a month, right? For three years, Jon. For three years. And then five, your best people complain about working on their account.

That's the signal. Listen to it, right? Here's your bonus signal, right? Free of charge, everybody. The owner is personally involved in the account.

That's a tax. You're paying for it with the owner's time. You're paying for it with your time owner, right? Three of those on one account, that account is underwater.

You just haven't done the spreadsheet that proves it. Wow. This is bringing back memories.

And it creates a little bit of a nauseous feeling for me. And I imagine some of our listeners are going, oh, holy crap. This absolutely is me.

This is what's going on. I'm getting dragged into these things because I want to service somebody better. And all those things that you just listed are natural.

Yeah, that's insane. So, if you understand that, you run the numbers, the big account is underwater, now what? What goes on? So, the first move, raise your price. The conversation is hard, but it's for one meeting, right? The math is permanent.

If they're at 18% and your shop is at 38, propose a path to 30 over two cycles. Just edge them up. That's all you need to do.

You don't go all the way from 18 to 38, they'll go shopping. But you can get them from 18 to 22 to 30 in two cycles. Second one, change the scope.

Strip the rush work. Strip the after hours. Make the discounted price match the discounted service.

They can't have both. Three, change the terms or actually probably return your terms back to normal, right? Net 30 is not net 75. Have them auto pay.

EFT this stuff. Initiate late fees. If they're a great customer, great customers pay on time.

Four, the one owners avoid, right? Walk. Fire them. Replace the revenue with three smaller accounts at full margin.

You'll be okay. You'll make more money with less if that's what you want. That just made people even more nervous.

Fire my biggest client? Oh my gosh. By the way, Ryan, you're my biggest client. Fire me.

Oh wait a minute. How's the margins? I don't know. Perhaps we dig in.

What about the relationship side though? I mean obviously you don't really want to fire your biggest client. You want to negotiate, renegotiate terms. You want to change some of the way you've just operated, the numerous things that you just run through.

But what about the relationship side when you've worked with people for years? Look, I hear it. I live it, right? And this is where most owners hide. But your job is not to be loved by your largest customer.

Your job is to run a business that funds your family, your team, and your eventual exit, right? A relationship where one side is quietly losing money is not a healthy relationship. It has to be mutually beneficial. It's a slow bleed dressed up as a loyalty if you're constantly losing money.

Sophisticated customers respect a vendor who runs their numbers. The ones who push back hardest on a price increase are often the ones who quietly admire that you finally did it. Finally did it, right? The ones who scream and leave.

We're going to scream and we're leave eventually. And this is it. You just front loaded the breakup, right? No.

Those are the ones you want to leave because they're price shopping. You're not Walmart. You're based upon quality, value, and it's a mutual beneficial relationship.

So if a price conversation ends the relationship, it wasn't a relationship. It was just a short-term discount. Right, absolutely.

Yeah, and you said something super important there. This is all about the eventual exit. We say that, buy it like you're going to exit even if you aren't.

So does it matter if somebody's not selling? How does this factor in? Well, it matters more if you're not selling, right? Because you're going to live inside the business another decade. Why live inside of a business that's paying as big as customer to be there, right? But for exit, this is one of the most expensive numbers in your data room. Customer concentration is one of the first things a buyer's diligent teams dig into.

They run the same analysis you've been avoiding. Any single customer over 15 to 20 percent of revenue gets the offer discounted. Over 30 percent and the deal can die outright, right? This is your cousin Vinny that we talked about in the previous episode, right? A six million dollar services businesses, I know, one client at 43 percent of revenue, the buyer didn't walk, it just dropped the offer by a full turn of EBITDA.

One multiple, right? One and a half million dollars, bye-bye, because somebody was at 43 percent of revenue. So, you know, that data point can be significant. So just a quick call back and heads up, right? Next week we go to the other side of the table.

Should I buy my competitor? Concentration is one of the first things the disciplined buyer screens for. Same data point, opposite seat, worth listening to before you sign anything. And so either you take the discount today by renegotiating or you take it at the closing table.

The customer doesn't care which, but your bank account does. Absolutely, yep. Last break and the punch line writes itself.

Which is? We spent 40 minutes telling you to renegotiate the customer who's quietly costing you money. Same energy, renegotiate the electrical contractor who keeps charging you extra to fix the same outlet. Or get the licensed pro the first time and skip the renegotiation entirely.

The Levitt crew has been wiring the seacoast for over 20 years. Homes, offices, full commercial builds, the pro who has done it a thousand times is the entire thesis of the show. That's right, leave it to the people whose job it is or as they say it, when it comes to electrical, leave it to Levitt.

Levitt Electric, Dover, New Hampshire, find them at levittelectrical.com. Get the right tool like John, right room, right pro. We see it every week. Yes we do.

I called you a tool. All right, so owners driving into the office, they're listening, hopefully they're listening, the three owners that we've got out there. Actually we have a good listenership now.

You know, we are pushing well into double figures every episode on launch day. We're getting up there, we're in almost in four figures there. Not bad for a couple of guys who don't know what they're doing.

Yeah not, hey, 29 is better than three everybody. Yeah, so yeah owners driving into the office right now, what's the one thing they do today? Okay, I need you to open up your accounting system. Not now, make sure you get to the office right or your laptop wherever you are and I want you to pull the customer revenue report, the trail in 12 months and just for your top 10.

Next to each one, write your best honest guess at what their gross margin percentage is. Everyone listening to this has a really good gut right and they kind of know where their numbers are. This is a really good exercise to see how good you got on this one right and do it by hand.

You know, is it 30, 40, 12, whatever feels true to you. Now circle the biggest one and ask yourself, when was the last time anyone renegotiated that account? If the answer is never, you just identified your first quarterly rock and that's that's part of our SOS stuff that we'll talk about later on. The best thing you can do is renegotiate the largest underpriced customer in the next 90 days.

That one move is worth 50 to 200 grand of annual profit forever right. You're going to get a better return than any new marketing channel you're about to fund. Sorry John, but just going back, it pays it right with one meeting.

This is how it can go. I don't disagree. I don't disagree.

Keep the customers you've got. It costs you a heck of a lot more to go out there and pay for others. Absolutely.

Let's skip to it. I think we've covered it in a good amount of detail. People have a takeaway list of going through, calculating the math, getting in there and renegotiating.

What's the takeaway from this episode? Give us a nutshell statement there, Brian. Your best customer by revenue is almost never your best customer by margin. Most donors have never run the analysis because nobody made them.

Pull the top 10, load the real cost, sort by margin percent. At least one account, I bet you, is quietly underwater. Comment, let me know if I'm wrong or not.

You have four moves. Raise the price, change the scope, change the terms, or walk. Customer concentration above 15% is a buyer discount you're paying every day until you finally take it at closing.

The customer doesn't care when you discover this. Your bank account does. Run the report this week.

Get more money in 90 days. Awesome. Great advice.

That's a wrap for this episode, Brian. Wrap, and I'd like to say konnichiwa to our Japanese viewer, John. We're really going.

Ohayo gozaimasu. There we go. You said it even better, folks.

It's all that rowing you did in college. Yeah, that's right. Well, my mother was stationed on an Air Force base, or all that side of the family, so I can actually count to 10 in Japanese.

Very useful. I've used it exactly zero times in my life. There you go, folks.

Awesome. All right, that's a wrap. That'll do it for this episode of From Burnt Out to Bought Out.

If anything we talked about today hit home, do us a favor, share this episode with another owner who needs to hear it, and if you're sitting there thinking, they're talking about me, good. That's the first step. Head to the show notes and book a free triage call with our team.

No pitch, no pressure, just a real conversation about where you are and what's possible. You can also find us on LinkedIn and at WeAreSynergySolutions.com. New episodes drop every week. Until next time, stop running the treadmill and start building something you can actually sell.