How to reduce the odds of ending up with bad clients

Not every client is worth keeping. Find out when it’s time to cut ties and focus on more profitable relationships

In the early days of entrepreneurship, it’s common to take on any client just to keep the business afloat. But as your business grows, it’s crucial to focus on attracting clients who align with your goals and values, and who are profitable and help you grow.

A great business relationship should always be mutually beneficial. If a client starts draining your resources or isn’t in sync with your goals, it’s time to step back and reassess—whether that means adjusting expectations or, when necessary, ending the partnership according to the terms of your agreement.

As a business owner, you get to decide who you work with. Here are some strategies that might help you avoid unproductive clients:

1. Choose clients who share your values
   Start by looking for clients whose objectives align with yours. This alignment should be clearly reflected in your contracts, setting the right expectations from the outset and reducing any potential misunderstandings.
2. Price based on value, not competition
   It’s tempting to undercut competitors, but that often leads to attracting clients who prioritize cost over quality. By pricing your services based on their true value, you’ll attract clients who respect your work and are willing to pay for quality, leading to long-term, productive relationships.
3. Monitor the profitability of your clients
   Regularly evaluate the financial impact of your client relationships. Tracking key metrics like cost of goods sold (COGS) and client acquisition costs can help you assess whether a client is truly profitable or draining your resources.

To get a better sense of each relationship’s profitability, ask yourself the following:

• Does your accounting system track both revenue and costs for each client?
  If you’re working on a project for a client, it’s important to track both the revenue they pay you and the associated expenses, like materials or labour, to assess profitability.
• What are the costs of goods sold (COGS) and acquisition costs?
  If you’re in a service-based business, your COGS could include labour or software expenses. Keep track of acquisition costs too, such as marketing or sales efforts, to see if some clients are more expensive to acquire and serve than others.
• How much time do you spend servicing each client?
  Track the time spent on each client through meetings, support, or project work. If a client requires more time than others but isn’t compensating accordingly, it may signal that the relationship is less profitable than it seems.
• What’s the revenue-to-cost ratio for each client?
  Comparing how much each client pays versus what you spend to serve them helps gauge their overall value. If the costs outweigh the income, it may be time to reassess the relationship.

Once you’ve assessed the profitability and resources required for each client, it’s crucial to know when it’s time to make the difficult decision to part ways with clients who no longer align with your business goals. Not every relationship will be worth continuing, no matter how promising it may have seemed initially. If a client is no longer profitable or is causing undue stress, it’s time to act.

Ending a client relationship can be tough, but it can open the door to more rewarding opportunities. Whether the problem lies in misaligned values, scope, or profitability, addressing it early helps your business stay focused on growth.

By prioritizing the right clients, setting clear expectations, and regularly reassessing profitability, you’ll avoid common pitfalls that can slow you down. These steps will help ensure your business thrives in the long run.

Ultimately, applying these strategies helps you build a foundation for sustainable growth. Choosing clients wisely will protect not only your bottom line but your well-being, giving you the focus and energy you need to take your business to the next level.

| Business Desk