The Opportunity Cost of Choosing the Wrong Clients

by on August 7, 2014 | posted in Entrepreneurship

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It’s been almost two years since Siege Media originally came to life. It’s been a wild two years, where I’ve moved from Seattle, to Long Beach, to San Diego, where Siege Media is doing great and continuing to grow. We are now a team of seven people and business is booming – but that’s not to say that the first two years have been without speed bumps and lessons learned. Among those lessons is one pivotal one that I want to reiterate with this post: be extremely meticulous when choosing clients.

When starting out – or at any stage of the process, inquiries are going to come that look attractive, but in the end, really aren’t – but you won’t really know the size of your mistake until months to years down the line. These choices end up seeming good, and especially good in the early stages, for one reason and one reason only: they have money to give you. But these clients have fundamental problems that will impact the long term growth of your company, and ironically cost you down the line.

These clients come in three forms:

  • Clients that likely won’t be able to generate ROI from your services because of the structure of their business, the current state of their business, or the goals they have aligned with your services.
  • Clients that want your help doing something that isn’t fundamental to your business model, and/or isn’t in an industry you would like to work in in the future.
  • Clients that are in the same industry as you that want to white label your work as a short term fix.

The reason choosing these clients ends up “costing” you is the realized lifetime value of that relationship is much less than a better client you were more selective in choosing. This is because the backbone of agency growth is referrals, and by selecting clients in these buckets, you A) impair you ability to generate them, or B) end up getting client referrals for work you don’t want.

These issues may sound basic on the surface, but have complexities that are hard to identify and/or say no to during the sales process, especially during the early stages of your company. Let’s take a look at what each issue presents and how it can cause problems for your business.

Clients Who Won’t Ever Make Money

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Different from “I did bad work”, this category has complexity that may hard to identify, but is incredibly important. It can’t be overstated – the best way to grow your business is to generate massive ROI for your clients. That’s stupidly simple, but when before you sign a contract, the due diligence to understand if/when the business will realize ROI from your work is something you’d be smart to investigate up front.

As we all know, SEO is now a holistic process and many arms of a business are responsible for its success or failure – so if your arm still does well but other parts are fundamentally broken (such as having a sub-par product), you will have difficulty realizing success.

Most businesses will still be happy with the work you’re doing, but because of their inefficiencies internally, this can potentially cause a shorter contract life if the internal problems aren’t worked out, which will create churn. Similarly, a baseline of happiness in that situation is good, but the referral chain is much stronger when you’re doing great work and the business is booming, not just the former.

There is also definitely a correlation with successful businesses and successful friends – if they’re doing well there’s a better than normal chance their friends are also doing well, so if you end up signing up with something broken that can’t ever get fixed, you’ve created a lifetime value hiccup that can make a significant impact on your business.

Of course, there’s also a secondary arm to this – taking on work doing things that aren’t necessarily your specialty that will cause similar problems. Doing B- work that’s passable but not amazing might get you a paycheck, but it probably won’t generate referrals, and even if it does, it won’t be the kind of work you’re world-class in that will consistently drive more referrals for you in the future.

In example, for us this would be something like website design. While we can do this passably, it’s not really in our team’s DNA to do it, it would take longer than other people, and I couldn’t confidently say we could do it better than someone else.

Referrals You’ll Generate That You Don’t Want

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A very similar but different issue is work that you can do well, but isn’t a big part of the businesses’ fundamental efficiencies that will enable it to grow faster in the future – or otherwise, grow in the way it wants to.

For example, maybe you’re a web design shop who also gets miscellaneous graphic design inquiries. You can do the random design work, but if doing that work takes you away from doing another web design contract that would have generated five leads from major companies, you’ve made a negative expected value (-EV) decision by taking on that client.

A big reason for this being a negative expected value decision is based on the future referrals it will generate – small graphic design projects probably aren’t what that web design shop really wants to be doing, and even if they do it well, they’re going to end up getting more leads for work they don’t want, creating a bad lead pipeline that can stagnate growth.

A spinoff of this concept is work that you can do and are good at, but just isn’t in an industry you’d like to work more on in the future. For example, if you take on a company in the payday loans industry early in your growth, it’s likely good work for that client will generate similar leads in the future – because industry friends tend to talk, and that payday loans contact likely has other friends in the financial arena.

So, if you really don’t want a future doing business and getting the majority of your leads from other scummy loan companies that want graphic design work only, it would really behoove you to turn down that lead and wait for a better, more attractive one – no matter how large in size it happens to be.

Clients That Want a Short-Term Fix

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The short-term fix concept comes from someone that wants to find a plug for a hole in their business. The most obvious and worst version of this is with white labeling – in an early stage, bigger agencies will approach you about white labeling work in an emergency or as a subset of a bigger contract with a client they might not have the bandwidth to take on at that moment.

Unless your business model is helping agencies primarily, such as a solo freelancer, this is a bad idea as white labeling is going to be low margin, and unsustainable – it is in the agency that hires you’s best interest to eventually crop you out to make more money themselves, and the “referral engine” will never come because they’re going to take on the leads internally rather than pass it on, even if you do amazing work.

Important Decisions at Early Stages

With each of these three situations, a yes instead of a no to this business can dramatically reshape the growth trajectory of your agency. At a bigger scale, they might have no impact – but when you’re at the stage where you only have 6-10 clients, taking one on that fits one of these categories will create a “pause” that you’ll have to wiggle around in order to continue growing, or more importantly, keep growing in the way you want.

It’s very possible to take on these types of clients and still grow, but it’s a strategic choice I recommend not taking, or heavily weighing before proceeding. It will be incredibly hard to say no to work at certain stages – and at a certain point, your ability to learn how will be the most important skill you can develop as an agency owner or employee.

There is a an interval where as a new agency you still are insecure about the future and therefore don’t have the faith to turn these kinds of leads down. If you have true faith and confidence – and the foresight to know things will work out, you can end up far for the better in the long run by saying no and continuing to do business development as you wait for the right opportunity to come to you in the future.

  • Priya

    Great insight Ross! I am in the early stages as you know and this is something I have thought about. When starting out, I am sure the pull of a steady stream of income could overpower the need to be picky about clients. And this is probably a good short term tactic. But important to keep these considerations in mind when thinking long term growth.

    I would also think that one needs to go through and experience this to truly learn what your capabilities and limitations are as well.

    Thanks for sharing.

    • rosshudgens

      I agree that you really won’t know what type of client you want, either, until you really start going. You’ll build experience identifying a bad client before they ever become one, and also identifying a business that won’t make money. I have thought that I had identified businesses that won’t make money in the past, though, and have been wrong (which I’m very glad about). I’ve also been wrong about ones I thought would do very well.

      Having the self-awareness to know when you’ve reached safety and can become selective will be a valuable skill. I’m sure you’ll do just fine figuring it out! Being able to be selective and have to say no is obviously a great problem to have.

  • tonyspencer

    “Clients that likely won’t be able to generate ROI”
    This. I always evaluate this for the prospect whether they ask me to or not. If I don’t feel like its going to be a worthy investment to work with us I let it be known before we kick off work on a pitch. Then I do everything I can to help them solve their problem either with their own team or with another agency or individual. I prefer to go to bed at night knowing I’m not wasting someone’s money.

    • rosshudgens

      Yup. Sometimes people want to work with us and fix concurrently and there is some risk involved with that, so if there’s something that *has* to be fixed that can be done in conjunction, we’ll sometimes take those clients. But I’ll be very transparent up front and say “we can do this, but this has to be fixed or you will never make money. Show me you’re committed to getting this fixed as we work together or we won’t move forward”.

      There’s some risk involved for us in that, because obviously, if they never get it fixed or get it fixed wrong, they still won’t make money. And if they don’t make money, that will end badly for both of us.

      Unfortunately, very rarely does a client come to your doorstep sparkling, because if they were, they wouldn’t be knocking on the door – so we often have to work together through the bumps and bruises, with the hope that they eventually heal.

  • Dan Shure

    Love your thought process Ross, and something I can attest to seeing you exercise first-hand. I think a valuable follow up would be “how to identify clients that will make money” – or just more specifics into what sort of things you do in the sales process to analyze if a client is a fit from that perspective. ie: do you look at search volume? How they monetize? Ask the right questions?

    • rosshudgens

      Thanks Dan. I do a few things: 1) look at SEMRush potential for their market, if the ceiling is $3k/month, they probably aren’t going to make money from us/period. 2) look into their markets/competitors. If it’s a one man shop going against Amazon, Ebay and etc, they probably aren’t going to be able to compete. Similarly if they’re basically an affiliate going against real products, I also worry about sustainability/being able to stand out in search. 3) I look at their current resources. Does their site look good enough? Are they investing in a site redesign? Are they willing to? Do they really understand how much it costs to compete in their space? 4) “Sniff” test. Sometimes you just get a feel about a biz based on how they communicate with you and looking around their site. That comes with time but most of it relates to 1-3 in some way.

      • Dan Shure

        By “SEMrush potential for their market” do you mean “SE Traffic Price”?

        • rosshudgens

          Yup exactly. Normally looking at their site won’t help (because they are probably behind) but looking at the people doing well already can give you a good feel.

  • http://keepkalm.com/ Kyle Alm

    This is a really tough lesson to learn starting out when you need clients. When you start to feel like you should cut one loose don’t hesitate. It’s time better spent finding better clients who want higher quality work that is worth showing to prospects.

  • Makayla Oxley

    This is a really challenging session to understand beginning out when you need customers. When you start to experience like you should cut one reduce don’t think twice. It’s time better invested discovering better customers who want excellent top quality work that is value displaying to leads.

    Spybubble

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