Try this. Who’s your biggest customer?
Got a name? Good. Now, who’s your favorite customer?
If you came up with two different names, you’re in good company. Most owners do. And the gap between those two names is worth a closer look, because a lot of small businesses are working hardest for the customer who pays them the least.
Here’s the short answer: the size of a customer isn’t the test. What’s left for you per hour of your time is. A customer can fill your calendar and still be the worst-paying work you do.
Let me show you what I mean.
Your biggest customer isn’t automatically your best
This week, Bob runs a custom cabinet shop.
About a third of his work comes from one home builder. That’s steady work, and steady work feels safe.
But here’s how that relationship works. The builder wants 10% off every job, because they “send a lot of work.” They move the kitchen layout after the boxes are already cut, and the shop eats the redo. And they pay in about 75 days, so the lumber for their jobs sits on the shop’s credit card for two and a half months.
On a sales report, that builder looks like the most important customer Bob has. They’re at the top of the list every month.
The sales report is asking the wrong question, though. It tells you who sends you the most money. It doesn’t tell you who leaves you the most.
What a customer costs you that never shows up on the invoice
The invoice only shows the price. It doesn’t show what it took to earn it.
There are three costs that hide from the invoice.
The discount. Ten percent off sounds small. But it doesn’t come out of your materials or your rent. It comes straight out of what you keep. If you keep 20% of a job at full price, a 10% discount just cut your profit on that job roughly in half.
The extra time. When a customer changes the plan after you’ve started, you pay twice: once to build it, and again to tear it out and build it over. Nobody sends you an invoice for the hours you spent redoing something. They’re just gone.
The wait. When a customer takes 75 days to pay, you’re not just waiting. You’re lending them money. You already bought the materials and paid the people who did the work. Until their check clears, that money is out of your account and in theirs, and if it’s on a credit card, you’re paying interest for the privilege.
None of those show up on a sales report. All of them show up in your bank account.
The number that tells the truth: what’s left per hour
So how do you compare customers fairly? You look at what’s left after materials, divided by the hours the job took.
“What’s left after materials” just means the price of the job minus what you spent on the stuff that went into it. Lumber, hardware, finish. Whatever is left is the money that pays your people, your rent, and you.
Then divide that by the hours. Now you can compare a big job to a small one, and a demanding customer to an easy one, on the same scale.
Here’s what that looks like for two kitchens out of Bob’s shop. One is for the builder. The other is for a retired couple who paid full price, made no changes, and paid the day the job was done.
Retired couple’s kitchen
Builder’s kitchen
Price
$12,000
$10,800 (10% off)
Materials
$4,000
$4,500 (includes $500 redo)
Left after materials
$8,000
$6,300
Hours
80
90 (includes 10 redo)
Left per hour
$100
$70
Same shop. Same kind of kitchen. The builder’s job took more time and left $30 less for every hour of it.
And that’s before you count the 75 days of carrying their lumber on a credit card. Add that in, and the builder’s number only goes down.
That’s the part that surprises people. The customer you think you can’t live without can turn out to be the one paying you the least for your time.
How to run this on your own customer list
You don’t need fancy software for this. You need your sales report and about an hour.
Once a quarter, pull your sales by customer for the last twelve months. Take your top ten.
Next to each one, write down roughly how many hours they took. Guess if you have to. A good guess beats no number, and you probably know more than you think. You know which customers need three trips and which ones need one.
Then take what you made on each customer after materials and divide it by those hours.
Now sort the list by that number instead of by sales.
That’s your real customer list. The ones at the top, go find more like them. The ones at the bottom get a new price or new terms.
Don’t be surprised if the order changes a lot. Bob’s builder sat at the top of his sales report and the bottom of this one. That doesn’t make the builder a bad customer. It makes them an underpriced one.
What to do about the ones at the bottom
When owners see a customer at the bottom of the list, the first instinct is usually one of two things: ignore it, or fire them. Most of the time, the right move is in between.
Start with price and terms. A customer who wants changes after the work starts can pay for changes. A customer who takes 75 days can pay a deposit up front, or pay on delivery. A customer who wants 10% off because they send you a lot of work can get that discount when the work is easy to do, not when it comes with redos and a two-month wait.
Some customers will say yes on the spot. Plenty of them never knew they were your problem, because you never told them.
The ones who say no were already costing you more than you thought. Losing them frees up room on your schedule for more work like that retired couple’s.
There’s one more thing to watch. When one customer is a third of your business, they usually know it. That’s where the discount came from in the first place. You don’t have to drop a big customer to fix that. You just have to need them less. Every good customer you add makes it a little easier to say, “Here’s what this work costs now.”
Busy and profitable aren’t the same thing
The builder fills Bob’s calendar. That feels like success, because a full calendar looks like a healthy business.
But a full calendar of underpriced work just means you’re tired and underpaid. The work that keeps the lights on is the work that leaves something behind.
The builder keeps Bob busy. The couple keeps Bob in business.
So here’s your one thing for this week. Write down your top five customers by sales. Next to each one, answer one question: would I want five more just like them?
Yes or no. That’s it. The ones you say no to are where to start.
Watch the full episode here: EPISODE 13 . And if customers who pay late are part of the problem, Episode 12 covers what to do when customers don’t pay you: Watch now.