It is the rare sewer and drain cleaning contractor who doesn’t know whether his or her business is profitable. Accounting statements or even the cleaning operation’s tax returns often provide that information. How many contractors, however, are aware that some customers simply don’t make money for their cleaning businesses?

That’s right, few commercial drain cleaners and general maintenance business owners or managers are aware whether their “best” customers are generating profits sufficient to warrant the degree of services demanded or provided.

The solution is simple: make those customers profitable or cut them loose. Obviously, improving a customer’s value to the business isn’t easy but it begins with understanding how much a customer costs.

Keeping tabs on costs

The often repeated “80/20” rule states that a large majority (80 percent) of any business’s earnings come from a very small number (20 percent) of its customers. In other words, most contractors and businesses make most of their money from a small percentage of their customers.

Customers who don’t necessarily pay much but who also don’t demand a lot of service may be good customers, while other customers may pay more but require so much assistance that they’re costing the contractor money.

The best way to research a customer and evaluate their profitability is to keep track of all interactions with that customer over a period of time. One week is obviously not enough and a year is too long. Most customers’ habits can be tracked within two- to four-month timeframes.

Gross profit margins are the most commonly used factor, but it cannot be immediately assumed a customer is not profitable because its margin is below average. That’s where other factors, including costs, come in.

Many businesses routinely allocate a portion of their overhead costs to customer service. More often, however, costs reflect only the cost of the services performed. Missing from this measurement is the time, support, effort, and ultimately the total cost required to meet the customer’s needs. Analysis that reveals the total cost by customer rather than by types of services often produces startling results that will shift the customer profitability discussion from anecdotal evidence or gut feelings to a discussion utilizing quality information. 

Cost accounting is the process of allocating all of the cleaning operation’s costs associated with generating a sale, performing a service, etc., both direct and indirect. Direct costs include such things as the total wages paid to workers, the salaries of supervisors, supplies expended, etc. Indirect costs are all of the other expenses associated with keeping the operation going.

Establish a system, create a goal

An analysis of customer profitability compares the costs of all of the activities used to support a customer or a group of customers with the revenue generated by that customer or customer group. It is usually not practical to identify the profitability of individual customers, unless there are only a few of them. Therefore customers may be grouped by size, industries and market or types of services.

To set up an effective cost accounting system, the help of an accountant or CPA might be advisable. Cost accounting can, after all, get fairly complicated. The money spent for professional guidance will be well worth it, leaving only the question of what to do about any “bad” customers.

Turning bad to profitable

The first step to turning unprofitable customers into valuable assets is determining whether the relationship can be improved. A sewer or drain cleaning contractor who believes in holding onto every customer, no matter what the cost, may never see his or her cleaning business reach its maximum earning potential.

Efforts should always be made at “reforming” the customer before asking him to take his business elsewhere, but each situation – and each customer – is different.

If the problem is one of slow pay with a small customer, scheduled services can be postponed until they’ve paid up. The same approach may work for larger customers if the cleaning business has enough leverage. Alternatively, a price increase can offset the higher cost of extending credit for a longer period of time.

Worried about the customer going elsewhere? Sometimes that’s a good thing. Problem customers become problems for competitors.

Acquiring and keeping profitable customers

It is five times more profitable to spend marketing and advertising dollars on retaining customers than acquiring new customers. In years past, focusing on customer retention was not as important because people had a personal connection with their service providers and “stickiness” came naturally. But that has all changed now.

Do you know how much of your business’s resources you allocate to marketing and new customer acquisition? Most importantly, do you know how much you should be spending to market the business? Most small businesses use a combination of guesswork, perceived funds available and gut feel to set their marketing budgets.

Understanding the lifetime value of new customers has allowed many cleaning business owners and managers to take a longer-term and more realistic view of attracting new business. Customer acquisition cost is calculated by dividing total acquisition expenses by the total number of new customers. Not too surprisingly, there are different opinions as to what constitutes an acquisition expense. For example, rebates and special discounts do not represent an actual cash outlay, yet they have an impact on cash flow and presumably, on the customer.

To compute the cost of acquiring a customer, CAC, the operation’s entire cost of sales and marketing over a given period, including salaries and other related expenses, is divided by the number of customers acquired in that period. Further calculations are necessary to determine how many prospects have been attracted by a marketing campaign and how many of those prospects were successfully turned into customers.

In order to compute the lifetime value of a customer, LTV, the gross profit margin expected to result from that customer over the lifetime of the relationship is computed. Gross margin would obviously take into consideration any support, installation and servicing costs over the projected life of the customer relationship.

Solutions and more solutions

There are a number of strategies for resolving the “Best Customer/Least Profitable Customer” conundrum including:

Increasing the profitability of already-profitable customers

Identifying unprofitable customers and realigning them to better manage costs

Pricing services more effectively

Improving negotiation processes with customers (discounts, quantity of deliveries, order size, payment terms, etc.)

The one thing many sewer and drain contractors often ignore is whether their best business decision may actually involve firing some of their worst customers. While this may seem like an illogical suggestion, particularly in a difficult economy, having the wrong customers can cost a cleaning business in unexpected ways and hold it back from real success with the temptation of short-term profits.

The operation may be stuck in a raw deal with minimum profit margins, losing the ability to service new and more profitable customers. The operation may also experience employee turnover due to burnout from servicing abusive or demanding customers, leaving the business with the expense of recruiting and training new workers.

Part of the challenge faced by many cleaning business owners and managers is how to extract the operation from those relationships without burning bridges or creating enemies.

Accounting for costs means more realistically pricing goods and services to ensure costs are passed on to the customer. Cost accounting can also prove invaluable when it comes to determining real profits, finding out what a particular job actually costs and what your “best customer” actually costs your cleaning business.