Should I ditch big-name, low-profit client or treat it as a loss-leader to attract new customers?
A. Caroline Plumb of Freshminds writes:
Loss leading is a valid strategy, but if you are going to do it for any length of time you have to be sure there is an ongoing payoff. To inform a decision you first have to examine why one might accept a lower profit margin. It would probably be acceptable to you to take a lower return for less risk, such as more stable revenue streams or large volumes of guaranteed work. If they are a large client and you do stop working for them you could lose some of this stability and it’s easy to ignore how valuable this is when you’re comparing profit margins across different sizes of projects. However, from your letter it does sound as though they are taking up a disproportionate amount of resource and you’re attempting to justify this because of the extra business you are winning.
The next step is to quantify the payoff in terms of the new business you say you are winning. To what extent are they really influencing other clients’ decisions? Are they directly referring new clients? Are they acting as a referee for you when you are pitching? Or are you just attributing some wins to them because when you mention their brand in your portfolio clients seem to be impressed? Unless they are actually making contact with your potential clients then you might find that your track record with them and a written testimonial can have the same effect and without the adverse impact on your profit margin.
Whatever the value of the new business they are bringing to you, if they are less profitable than other clients who commission the same value of work you ought to try to renegotiate the contract. It’s easy to feel you can’t negotiate with a well-known company but remember that with this long-standing relationship the switching cost for them may be high, so presenting a clear, compelling argument with value-based pricing should yield results. If you can’t negotiate on the overall price with them try to identify the components of the work you do for them that are more profitable and cut back your services to deliver only these parts. That way you keep the reference client but make more profit per hour.