On Tuesday a friend told me about two contractors that will likely shut their doors even though both have backlogs of work. Their problem is their backlogs are filled, as are many contractors, with low margin business secured through bidding.

On Wednesday a real estate broker told me he’s trying to close on a $6.0M piece of development land in California. He said, "Since I'm selling to the government, it's almost impossible to get anyone to make a decision."

Later that day a contractor came to our house to repair our air conditioner. His business is booming. However, he said, “The majority of my business is as a sub-contractor to (name withheld, it’s a national home warranty company).” As such, it is low margin business.

Finally, a local printer told me that he was busy but every job becomes a rush job. He said, “The requirements always change, the edits seem endless but the deadlines stay the same. So we end up shifting our production schedule and paying overtime, and that kills our margins.”

Is there common thread? Yes, a need for better customers. Customers who will pay fair value for your services and respect mutually agreed to deadlines.

Don’t get me wrong; I’m sympathetic. I run a small business myself, and the temptation to think any order is better than no order is strong. I’m also not saying fire all your marginally profitable customers.

What I am saying is we all need to take decisive action to balance marginally profitable customers with highly profitable customers. To actively seek good customers because we already know the marginal customers will find us.

Your customers are similar to a portfolio of stocks in that both represent future income, at least in theory. If a customer consistently insists on the lowest price, then that customer needs to be replaced or subsidized, just as you would an under-performing stock. This can mean raising their prices or balance them out with a higher margin account. If a customer can’t make a decision and the back-and-forth time costs you money, then that time needs to be factored into the original price. 

I asked each of these people what they were doing to correct their situation, to secure better customers? Only one said, “I need to do more marketing.” Guess which one?

Steve