Although I completely agree with the old adage “No business is inactive”, not all deals are of equal value. Some deals are much better than others, but salespeople often have a hard time receptive to this mindset. Partly because they are obsessed with revenue. They are used to thinking that every deal is good, and the bigger the deal, the better. In fact, the size of the deal is not as important as the gross profit you can make. Too many deals with low gross margins can make you bankrupt.
Therefore, many entrepreneurs think that they should focus on contracting with large customers. I remember a young man who was planning to start his own advertising and marketing company emailed me. He said he had everything he needed to get started money, relationships, business experience, a well-equipped office, etc. Only he wasn’t sure about his target audience. . “Small clients are boring, I don’t want to bother with them,” he writes, “but the big client seems out of my reach. Do you have any advice?” I advise him to forget the boredom. Building a business from scratch is never boring. Instead of alienating small clients, he could sign as many contracts as he could manage and charge higher prices. In the future, more small customers will help him prosper than one or two large customers.
Small customers are the backbone of a solid, stable and profitable business, especially in the service sector. I love nothing more than owning a service company with 10,000 small clients, each bringing in about $5,000 in revenue per year. That is my ideal company. The big customers are also not unimportant. Sooner or later, we need them to thrive. But you should never look down on small customers or disrespect them. The more small customers you have, the happier you will be. Why? I will give you three reasons.
Firstly, you will get better gross margin from small customers because they pay more for your services. They have no choice. Simply because they do not have the bargaining power of large customers. Therefore, you can charge the highest price for small customers. For example, in my line of business, the record-keeping industry, most companies have a standard price point. That’s the price of a box that applies to any customer with up to 500 boxes. Usually a customer with 10,000 boxes will enjoy a lower price. I never lower prices so low that gross margin is affected, but I do have to offer some discounts because we have to compete with other vendors to get the deal. For small clients, I can keep our benchmark rates the same, which helps strengthen our margins.
Second, small customers will help the business stabilize. If you treat your small customers well, they will stay with you forever. Partly because they are loyal, partly because they don’t want to change. In addition, another reason is that they are not competed by competitors like large customers, because most companies do not pursue small customers. For example, when I was in the mail business, everyone knew where to find great clients – law firms, advertising agencies, etc. – and everyone was running after them. It takes a lot of time, effort, and money to win one of those customers, as well as to find and sign a contract. Furthermore, the revenue size of one large customer is equal to the revenue size of two hundred small customers. Therefore, competitors often ignore small customers. When small clients come to us, they rarely leave.
Third, a large number of small customers will make your business less vulnerable in the event of a single customer leaving. That’s why when you apply for a loan, the bank will ask you for a list of all the customers who account for more than 10% of sales, as well as the percentage of each customer’s sales. If a single customer accounts for more than 30% of sales, you’re in trouble. That means you are completely dependent on that customer. If you are on leave and the client wants to see you, you must take a break from work to return. If you have a contract with a client, you will be extremely nervous when renewing the contract. The truth is that you have no control over your business. Big customers can pretty much dictate pricing and terms, while you can’t object too much.
Of course, you probably don’t have the resources to start with many small clients. Many people build their businesses on the revenue streams of one or two major clients, there’s nothing wrong with that. But you need to immediately start expanding and diversifying with small customers, or you will quickly become a slave to large customers.
What is the purpose? I don’t think a company can be considered safe, even if their biggest customer accounts for more than 10% of sales. Although I care a lot about big customers, I still feel they are vulnerable to me, so I try to win as many new customers as possible, especially small ones. But even that is not simple. Although small companies provide stability in business, finding them is not easy and quite expensive. You can’t ask salespeople to spend all their time looking for small customers. Instead, I instruct them to combine meetings with three or four small potential clients whenever they make a random visit to a large client.
Sometimes you get lucky. That’s what happened with the acquisition of the company I wrote about at the end of the last chapter. Most are small customers – literally thousands of small customers. I asked Jack how he managed to get so many small clients without the big ones. “Well, we used to have great clients,” he told me, “but we lost them to people like you. All that remains are the small customers. It took us 60 years to get those numbers, so it’s very sustainable.”
Honestly, I think Jack’s clients are better than mine. When I lost a customer with 40,000 boxes of records, it was a heavy loss. But it took him 200 clients to feel the pain. Luckily, it didn’t take me 60 years to get the same results as you. Within twenty-four months, we had completed the conversion of all of your customers – about 40,000 customers – into ours.
WHEN PRICE IS NOT THE RIGHT SOLUTION
Unfortunately, the majority of customers do not easily belong to you as in my case. In fact, closing a deal with a high gross margin is not easy, and there are always potential risks. In the late 1990s, our sales went through a very difficult period. It’s not enough just to reduce the price, because other companies’ prices are low. Sure, there are still a few instances of exceptionally high pricing, but most of the lucrative deals are gone, and customers know this. They know that they won’t be able to save much by just buying for the cheap. So, to get customers, you have to offer something more valuable than a discount. You have to overcome customer loyalty, loyalty is not always strong. Customers – the first time you approach them – will say that they like their current provider and will certainly not change. When that happens, it’s not enough to just state that the products and services you offer are better than the competition. You have to prove it to them.
For example, once, I had the opportunity to recommend a record-keeping service to a large accounting firm in New York. A friend helped me arrange a meeting with the company’s procurement partner. I know it will be difficult to sign a contract with them. That partner has a close relationship with the current hosting company, and he makes no secret of this. “Honestly, I’ve been working with these guys for a very long time and I like them,” he said. I guess they will only need to bid close to our price to keep the business going. In fact, his intention was to use us to get a better deal with the old supplier. That’s all he really wanted.
Of course, what I want is the contract. In order to win, I had to show them how we could save their company money. I offered to take the time to visit the company’s filing room to learn how their records are managed. “Record management is my business,” I said, “I believe I understand it better than you, and I can offer a few tips to help you improve the system.” He thought it was a great idea, and asked the manager to lead me down to the filing room.
What am I looking for? Two things: internal savings and external savings. I wanted to find a way for the company to save money not only through changing the way it works internally, but also through cutting costs incurred from the outside service. I had no trouble dealing with both. The company has a manual record keeping system. In the filing room, there is not enough space for employees to enter the contents of the file directly into the computer. Instead, employees will write information in a notebook, send boxes of files outside for storage, and then process on computers. However, this way is too outdated and they only see computers as a backup tool.
Inefficient system. It requires too much manpower, too much time, but brings serious errors. It also costs the company more than it needs to for a data retrieval service. For example, because there are so many filing boxes at the headquarters, the company often has to move back some boxes to make room for new boxes. As a result, they have to order and pay for five deliveries in a week, when they should only have to pay once.
I stayed in the filing room for about two hours. Then I called my partner. We arranged a follow-up meeting, with three people in my company and seven people in their company. The meeting started at five o’clock in the afternoon, and lasted nearly five hours. I told the people in the company everything I found and made a few recommendations to help them cut costs, some solutions that were immediately applicable. I also offered to help them find the software they needed to upgrade their computerized search system, based on the relationships we had developed with other businesses.
You should clearly understand what I’m doing here.
First, I am educating my partner and his staff about my work. I’m teaching them how to save money by being a smart record holder. The more I talked, the more they asked, as if they never really understood what they were paying for.
Second, I show them what they are not getting from their current supplier with a positive attitude. As I mentioned before, I never speak ill of a competitor to a customer. I believe that when you do, you will shame yourself. But you still have to show them how you are better and why when using your services, customers will get more benefits than other providers. Therefore, I am cautious to point out a few potential external savings that they cannot get from their current supplier. Our competitors don’t have the right technology. But we are
Third and most important, I am building trust. How? By giving away our ideas and experiences. By acting without any guarantees. By investing a valuable time and effort to help the company save money, but without asking for anything in return. In essence, I am facilitating that partner to use our services because he can rely on us to get the best benefits for the company. I showed them that not only did we save the company, but we wanted to save the company money, that we were truly trustworthy. I gave him the best reason to change suppliers: peace of mind.
That’s exactly what you must do if you want to compete successfully in an environment where customers are too loyal. You must prove that you deserve their loyalty more than your competitors. It’s a long, difficult, and expensive process, and you don’t always come out successful. Fortunately, we succeeded, but it took us another eight months. During that time, we continued to advise the company and spent hours discussing several terms for a possible deal. Meanwhile, the company continues to negotiate with competitors. In the end, our perseverance paid off, and we won the client, a success beyond our expectations.
Of course, we wouldn’t have succeeded without really putting in the effort. The truth is, you need to know your business well. In other words, a business owner’s knowledge is an important competitive advantage. I use my knowledge whenever possible.
I have a job placement company founded three years ago, and we are in a precarious position. Business is good for three or four months in the spring and two or three months in the fall. The period between is almost no revenue. Our cash flow dropped to zero. Meanwhile, we still had to pay our employees. We tried to attract customers with low season discounts, but it didn’t work. Cash flow plummeted and we had to spend most of the revenue of the good months to make up for it. This problem is ruining the company and confusing me.
First, off-season discounts are often ineffective and can destroy a business’s bottom line. Instead, you should look for ways to diversify your offerings. Is there any other type of business you can offer during off-peak months? Or can you mentor in the meantime? Diversification is often the best solution to seasonal revenue variations. In the meantime, deal with the cash flow problem directly. Can you negotiate to pay the rent during the months when you have more money in the bank? Or speed up debt collection time when cash is scarce? Try explaining the problem to your employees and asking for their opinion. Maybe they’ll give you ideas you never thought of.
LISTEN AND MAKE MONEY
Interestingly, the best way to increase sales is also the most obvious one, although you’d be surprised how rarely people use it. I’m talking about listening to the customer. It’s so rare these days that you can really gain a competitive advantage just by listening.
I will tell you a story. One day, I took two people from a large New York law firm on a tour of our filing facility, hoping they would collaborate with us. Things didn’t make much progress, until the office manager said, “By the way, we want all of our documents to be stored in sequential order. If you take them out, we want to put them back in place.”
Normally, we don’t put the boxes in a separate order. The barcode system allows us to find the boxes of records instantly no matter where they are stacked. But I always try to give my clients what they want, and this prospect just told me what she wanted. I replied, “Okay, no problem.”
She looked at the other, then at me. “You’re not going to say I’m crazy, are you?” she asked.
“You didn’t ask for my opinion,” I said. “You just tell me what you want, and I believe you have your reasons.”
She started laughing. “Oh, in other places, they always try to argue this comes with us. You were the first to say, ‘Yes.’” So we got the client.
In telling this story, I am not implying that listening to customers is easy. On the contrary, it is the hardest part of the sales process. All external problems will prevent you from listening. Because you always believe that you know what’s best for your customers, and sometimes you’re right. For example, I understand well why competitors try to avoid ordering boxes of records by number. From a hosting company’s perspective, that’s an inefficient way of doing things. It doesn’t do any good, it just creates more problems, and the customer has to pay more for the service. Perhaps, other companies think they are offering a better option to customers. Except for one thing: that’s not what the customer wants.
When you’re selling, you’re completely focused on finding what the customer wants, and then delivering it to them if you can. But the truth is, you don’t really know what’s best for them. So what should we do? In fact, there are still many factors that you do not realize. I’m not opposed to helping customers find a better way to handle their requests, but you have to be careful. It’s easy to confuse your needs with those of your customers, especially when you’re trying to close a deal.
Pride also affects listening to customers. As a salesperson, you will tend to emphasize the best of your company. You’re proud of them, that’s completely justified. You want people to know the special services you offer, or the hot new product lines, or the state-of-the-art computer system you’ve just invested millions of dollars in. So what happened? You are only interested in selling. You don’t listen to your customers when they say the computer system is not important to them. You think they should take it seriously. You know, if they were more knowledgeable, it would matter to them. So you keep rambling on about the benefits of that computer rig, and don’t notice their gazes have shifted away. You have lost them.
Next, of course, is the ego factor. When I take a potential client on a tour, some people
Some of them look at all the boxes in my warehouse and say, “Oh my god, aren’t you afraid of a fire?” Actually, I am not afraid of fire, and I can answer: “No, we are protected. This is not a matter of concern.” But that will be the “me” answer. Customers ask because they are afraid of fire. I don’t care why she’s worried. The point is that I need to respect the client’s concern, not take it lightly. That’s why my answer was: “Yes, of course, I took the risk of fire into account, let me show you what we did about that.” Some people may criticize me for being dishonest. But I don’t think I’m selfish. I put my “me” aside and responded to the client’s concerns.
And that’s my goal as a salesperson. I’m not worried about winning deals. I’m only interested in making my clients feel heard, understood, and responded to. I want them to leave feeling happy and at ease. If they sense it, the revenue will come on its own.
You can’t make your customers happy and comfortable if you don’t really listen, if you don’t give up all your preconceived ideas, prejudices, plans and options to listen to what they have to say. really want to say. This does not happen naturally. It requires discipline and practice. You have to get into the habit of removing all obstacles. I usually sit quietly for a few minutes before giving clients a tour of the company, trying to keep my mind like a blank sheet of paper. I repeat: “No prejudice. No prejudice.” I dismiss any thoughts that prevent myself from listening to or observing the client. Yes, I will talk about the product, emphasizing the things that I consider important and useful, but I will not push the customer to do anything but find out what they want. I will look for verbal and nonverbal cues and respond accordingly.
And it’s effective. I observe, listen, and find the unexpected. Sometimes a customer will comment on an issue that I disagree with, I will remind myself: “No objection. No objections.” You need to make an effort to avoid distractions. On the other hand, selling becomes easier when you listen carefully to what the customer has to say. Just tell them what they want to hear, but don’t mislead them. The information should always be true and accurate, but you can highlight the parts that interest them most. You don’t have to compose a sales pitch. Customers will tell you what you need to say.
You need to understand that I am not asking you to give your customers everything they ask for. Sometimes customers ask for things you can’t, or shouldn’t provide, such as selling for less than necessary. Most entrepreneurs are wise enough to realize that if they discount too much, their company could be in serious trouble. However, there is a way to reduce the price that even the most adept entrepreneurs can make mistakes. It can destroy entire industries, knocking down established companies, not to mention countless new businesses.
I’m a tie designer, and I finally got what I needed. I contacted a local menswear chain and convinced them to take a look. I sent them tie samples, fabric samples, photos, and more. Two months ago, the store promised to order. From then on, I kept calling, and they kept making excuses that the store was supposed to fax the order, but that wasn’t true. I don’t like doing business with a partner who doesn’t take his promises seriously. Should I bother them again?
If I were you, I’d send them a short and witty note charging for the ties. Say something like: “I believe you love my ties, you must be wearing them, but I am a small business, I must be paid for the service I provide. . If you are not satisfied with the ties or for any reason, you can return them. If not, please send me a check.”
I’m talking about the habit of selling excess capacity at a discount to make sure it’s not wasted. Excess capacity can take the form of an empty warehouse, or underutilized machinery, or even time for a mentor. When there is an opportunity to sell excess capacity at a discount, it is difficult for most people to turn down. They only think about the money they would make from something that would go to waste if not used. They ignore the dangers that can arise if they undervalue the service.
I call this the power trap. Why? Because, at first glance, it seems that you are making a sound business decision. But in reality, you are on the road to bankruptcy.
Consider the case of a guy who rented a truck, hired a few workers, and got into the trucking business. Suppose, his standard rate is $45 an hour, and he has three trading days in a week. Then, due to difficulty, he could not find a customer to buy the service at that price. Finally, one customer offered to rent the truck for two days at $25 an hour. He thought, “Why not? Anyway, I have to pay for the car rental. I should get something out of it. I certainly don’t want it to just lie there.” He accepted the offer, and made an extra $400 a week. He feels satisfied. He made good use of his car. He doesn’t let power go to waste. How can you call it a mistake?
But that was really a serious mistake. First of all, he certainly made less money than he thought. Because he only focuses on one factor: capacity, the cost of renting a truck. Meanwhile, he ignores all the other costs he incurs such as gas, wear and tear, and labor costs. In fact, he could have done better by leaving the truck alone for two days, but he didn’t notice this because what he saw was revenue, not profit. That’s a pretty common mistake, especially with startups. And that was a fatal mistake.
But let’s assume he’s factored in operating costs and realizes he can still make a profit. Renting a car at a low price is still a bad idea. I call discounting just to avoid wasting capacity a bad idea for four reasons.
First, the cost of capital is incurred. In fact, whenever you make a deal, you lend it to the customer, at least until the bill is paid. This is the same as investing in the form of credit. You need to make sure you have a good rate of return on your investment, meaning you’re using your capital to earn enough profit to grow your business. Businesses will make the mistake of wasting capacity on deals with low gross margins. It’s suicidal, especially for new businesses with limited capital. They won’t be able to get out of the startup stage if they run out of cash.
Second, an opportunity cost is incurred. When you’re leveraging capacity with low-margin deals, you don’t have room for high-margin deals. What will the carrier do if he finds another customer willing to pay the standard rate?
Meanwhile, by lowering prices, he has only given the market one more competitor: himself. This is the third reason you shouldn’t go after a low-margin deal is based on the basic law of business, special, that price will return to its lowest point. When you charge two different prices for the same service, you are competing against yourself, and it is only a matter of time before the competitor with the cheaper price wins. Customers are not stupid. Sooner or later, they will realize that you are willing to sell at a lower price. Then you will have a hard time getting them to pay more.
Fourth, you will inevitably lose customers who are willing to pay standard prices and, more importantly, resist discounting to take advantage of capacity. This practice will drive away customers that are essential to the company’s success, even survival. They will be angry when they learn that you charge other customers lower for the same service. They’ll think you’re trying to take advantage of them. I don’t care what price you offer. They have gone.
The story of the truck is a classic case of a power trap, but you should also recognize it in auction situations. I remember once a large city held a contract auction. I really wanted to get that deal, but I lost to a new record-keeping company because they offered a monthly rent of 13 cents per box, about 40% less than my rate. I just laughed. At that price, I don’t want to make this deal. Honestly, I can’t understand why anyone would want it. A few weeks later, the winning bidder, let’s call him Jerry came to visit me. The owner of that company asked me to give this guy some advice. I quickly realized that Jerry was bewildered by the course of the auction. “I was surprised that you didn’t offer a lower bid,” he said.
“I would never bid on your level,” I said. “You can’t meet 13 cents per box. You are losing money on that contract.”
“That’s not true,” he said.
“Is not right?” I replied. “Let me show you.”
We sat down, and I took out a piece of paper and a pencil. I asked Jerry how tall his building was, then calculated the number of boxes that could be stacked from the ceiling to the floor. Knowing the total number of boxes that can be stacked, and the size of each box, we can calculate how much space the boxes will take up. We also know the monthly revenue from the boxes. Dividing revenue by storage space, we determined that Jerry would have monthly storage revenue of $6.60 per square foot. “You can rent out the warehouse to a customer for $8 or $9 per square foot, and you’ll pay taxes, energy and lighting costs. In this deal, you not only have less revenue, but you also have to cover all the costs yourself.”
“Oh my God.” Jerry exclaimed. “I never thought of this.”
I know some people would argue that Jerry did the right thing. After all, his warehouse was empty at the time. He also paid taxes, energy costs, lighting and other expenses. Even at 13 cents per box, the contract with the city helps him cover those costs. So why shouldn’t he take what he should have?
The answer is, if Jerry can be a better landowner, why should he get in the trouble and incur the expense of such a business? In fact, you should always question whether you could make more money using your capacity in a different way. Surely you are doing it wrong unless you have a plan to improve profits over a certain period of time.
Of course, there are exceptions to every rule, and here too. I have to admit that in some cases, selling off excess capacity works, as long as you meet two conditions. First, you and the client must agree in advance on the length of the discount and what happens after maturity. Second, you have the ability to explain the deal when other customers question it. They want to feel that you are fair. For example, I once used some free space to win 200,000 boxes of resumes from the company’s biggest competitor. The customer discovered they were paying above market rate after several automatic price increases, they started looking for a few other suppliers. We offer a ten-year contract with a special discount for the first two years. We were able to make this offer because we had plenty of free space in one of the warehouses at the time. In the third year of the contract – when the customer started paying the regular rate – we finished building a new warehouse. We then replaced the construction loan with a mortgage, and the extra revenue from that customer offset the monthly mortgage interest.
So from the start the customer knows exactly what the deal is. And if a customer asks me about this, I can point out that we offer them a discount in the range of
first time. I can even offer them the same deal as a new customer if they are willing to sign a new ten-year contract for 200,000 boxes.
However, that is a special case. Usually, the idea of selling excess capacity at a discount is still a bad idea, but that doesn’t mean you shouldn’t give your customers a discount. In addition to just taking advantage of excess capacity, selling at a discount should have another reason. For example, trading volume is a common reason. Or you can offer discounts to customers who accept some special terms. Or better yet, keep the same price but add value-added services. This varies from customer to customer depending on their needs. Even if you have to pay extra to provide the service, at least you are using your money wisely. You get standard paying customers. You do not reduce the average price. And you’re not doing anything to drive away existing customers. The worst that can happen is that they might demand the same service. But that’s a positive, not a negative. If you’re known for your value-added service, customers will come to you, and you’ll find you can charge extra for this service.
However, you may not always be so lucky. You can just sit there with an empty, motionless truck, and the customer doesn’t care about value-added service, or bulk discounts, or anything else. He just wanted to rent the truck for $25 instead of the usual $45. In that case, you should go back to the first and most basic lesson in business: you can’t do business with everyone. There are people in this world who want more than you can give with their money, no negotiation can change their mind. There’s only one word you can use to deal with such customers, you have to learn it, even though it’s hard for you to utter when the customer is putting your revenue at risk. It’s from No.
First: You will perform better if you have a lot of small customers than a few large ones.
Second: When you’re about to sign a client, actions speak louder than words. Let them experience the services you provide.
Third: Listening is a lost art. You can gain a competitive advantage simply by listening carefully to what your customers are saying.
Fourth: Discounting just to take advantage of capacity is always a bad idea. If you do, you’re ruining the more profitable business for the company.