When small businesses look at their costs of servicing customers, what areas must they concentrate on? More importantly, how does a small business determine its service costs and are there any strategies they can adopt to reduce these costs? Well, for some small businesses, the cost to service a customer is simply the cost of doing business. These companies see their customer service department as a support structure to deal with any and all customer requests. However, for other companies, reducing these costs involves improved customer management strategies that focus on managing customer expectations, stronger inventory control & support, as well as a focus on reducing the company’s financing costs on receivables.
1. Improved Customer Management
What does it mean to better manage customers? Granted, it’s not an easy question to answer. However, it can be made easier when you take the time to think of your company’s business model, your market and the type of customers your company services. For instance, managing customers is entirely different in a B2B (business to business) environment when compared to a B2C (business to consumer) environment. In a B2B environment, a company’s service levels and abilities are often different from its competition. This is due in large part because of the different company sizes, market reach and operational abilities between small, medium and large enterprises.
Mistakes are made when companies try and go above and beyond what their abilities entail. Instead of managing customer expectations, they set the bar too high and are forever behind the proverbial “eight ball”, so to speak. In a B2C environment, these service levels are far more competitive because the business model focuses on servicing consumers. For instance, a restaurant or retail chain must have comparable service levels in order to retain its customer base. It’s essential to understand the inherent differences between B2B customer management and B2C customer management.
To read more about B2B customer management, please read the following two posts
The Importance of Managing Your Customer's Expectations
Has Your Company Created a B2B Customer Service Nightmare?
2. Costs to Financing Receivables
What are your company’s costs to finance receivables? Are you aware of the daily cost of money and its impact on your company’s bottom line? If not, then it’s time to start defining what it costs your company when your customers take too long to pay invoices. Most companies understand that a customer’s inability to pay on time costs them money, but fewer take the time to track just how impactful these costs are. Most small businesses use business loans and credit lines to finance their inventory.
The yearly interest rate on these loans can be broken down into a daily interest rate. Every day a customer’s invoice is unpaid, is yet another cost to finance that receivable. However, there are strategies to reduce these costs. Prompt payment incentives, discounts and even prepaid customers, are all fantastic sources to defeat the daily cost of money and improve gross profit. Make it a point to reduce your company’s financing costs. Doing this will reduce your overall service costs.
Cost of Capital, Cost of Borrowing Money and Your Bottom Line
3. Supporting Inventory
Inventory is that one necessary evil all companies need. It costs money, but is an essential tool when looking to grow market share. Small businesses must be able to justify their investment in inventory with customers who are willing to support their inventory. What does this mean exactly? It means to use contractual agreements on supply with those customers who understand and respect your company’s inventory costs. Think of the customers who continually take the inventory your company has allocated for them.
What are the costs to service these customers compared to those who continually leave your company holding inventory it can’t sell? Obviously, those customers who support your inventory are far less expensive to service and much easier to work with. Granted, not all customers will be willing to sign such agreements. However, if they aren’t willing to sign a contractual supply agreement, then don’t hold inventory for them. It really is that simple. Work with those customers who understand your company’s costs to finance your inventory.
Helping Customers Plan Purchases With Contractual Supply Agreements
Reducing a company’s customer service costs involves doing away with the outdated view that the customer is always right. This antiquated view of customer service forces small companies to overextend themselves and make promises their service capabilities simply can’t match. In B2B sales, trying to match the service levels of competitors, without the ability to be successful, will do nothing more than increase costs and lead to an upset customer. The focus must be on reducing the costs to service customers by better managing their expectations, working with customers who respect the company’s inventory holding costs, and pursuing strategies to reduce the costs to finance customer receivables.
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