It's Not Me, It's You: When to End a Toxic Client Relationship

It's Not Me, It's You: When to End a Toxic Client Relationship
Image credit: What What | Flickr
Reader Resource

Position yourself for growth in 2017—join us live at the Entrepreneur 360 Conference in Long Beach, Calif. on Nov. 16. Secure Your Seat »

We’ve all had them: that one client that makes you question if you still love doing what you do as a professional. They're paying for your expertise, but they don't listen. They don't value your time, they’re late on payments and challenge you on your invoices, even though you've cut them a massive break…again.

When we first start out as a business owner, we all need to put up with bad clients. We needed their work, no matter how unpleasant, to make payroll and rent. Or perhaps we needed their testimonial to land the big account we really wanted. Given how the economy has been over the last few years, you might have needed to put up with the abuse just to get by.

But times have changed: You're not just starting out, and the economy has truly turned the corner. This means it is time to take a good hard look at your painful clients and work out which ones are toxic to your business and your team. If you want to take your business to the next level, you can't be pulled down by the dead weight of bad clients.

Here are four signs that you might be in a toxic relationship with a client. If you often find yourself in more than one of these scenarios with a client, it might be time to reconsider that relationship:

Related: How to 'Fire' Bad Customers Without Burning Bridges

1. Cost-focused clients

When you’re starting out (or short on work), it’s tempting to agree to take on clients and projects that pay next to nothing because something is better than nothing, right? This may be true, however, as you grow, these clients can become a burden to you and your team. They've been "anchored" to a certain price point, and if they're focused on costs rather than the value of outcomes, you're never going to escape the weight of their lowball expectations. As things pick up, your time can be better spent elsewhere -- either working for better paying clients or investing in your business's marketing and sales initiatives to ensure that you continue growing.

The key with this kind of "break up" is to approach it gradually: Going cold turkey here can be fatal. Take a look at your financial forecast and only cut ties with low-paying clients when you know you've got work locked in for the next few months to cover whatever shortfall their departure leaves you.

2. Constant scope creep

All services businesses have experienced clients that try to go above and beyond the agreement. This isn’t always their fault. You're the expert, and they're probably learning as you work together. If you set the precedent early that you’re willing to do more than what they’re paying for (because you want to please them, after all), they’ll continue to push that.

The downside, however, is that a client that's consistently asking to do more and taking advantage of you and your team, prevents you from adding more paying clients to your roster. This can stress out your team and cause personal conflicts with the client.

If you’re experiencing a lot of scope creep, recognize your client’s need for more work and ask for a higher retainer or break the project into phases. Clients who want you to do more for them aren’t always bad, as long as they’re willing to pay you for the work you’re putting in. If they’re not open to a higher retainer or an extended project scope, it might be time to let them know that you’re unable to do the amount of work they need at their price point and suggest severing the relationship.

3. Late payments

Many businesses fund themselves (and grow) off trade credit -- the 30-, 60- and 90-day interest free debts they have with their suppliers. In industries where everyone in the supply chain is doing this, it isn't such a problem. However, in professional services, going along with this sort of behavior can be suicidal.

Related: How to Win Back Lost Customers

This is because 50 percent of every dollar a professional service business spends is in employee salaries, not counting contractors or payroll-related costs like taxes and insurance. What would happen at your business if you decided not to pay your team for two months just because one of your clients thought 60-day terms were normal? Given the average professional service business runs on profit margins of around 10 percent, having clients not pay you for 100 days means you're eating up every cent of profit for a year worth of hard work to cover their bad behavior. Not only does this make it hard to invest in growth, but it also puts you in serious financial peril since any project that goes over budget during these three months you're waiting to get paid is enough to sink your business.

The rule here is simple: Never start a project without a deposit. And never deliver a project without final payment, if not in full, then with a small holdback of 10 percent on a short-term warranty basis.

4. Ignoring your advice

You and your team are professionals who spend dozens of hours each week becoming experts on your clients’ industries, learning best practices and honing skills you’ve spent decades building. Your clients are paying you, your advice and expertise, and if they’re not accepting it, they’re wasting your time and their money. They won’t get the results they want and you’ll spend time on projects that are against your best practices. Why spend time doing work that is less than your best?

As a professional, you can only be helping out one client at any moment of the day, and since you never get to live the same day twice, you’re giving away something more valuable by persisting with a client who doesn’t take your advice.

Ultimately, the decision to sever a relationship with a client is not an easy one to make. It shouldn’t be a quick decision nor should it be based on isolated incidents. But, if the above problems are recurring and your company can handle the temporary loss in revenue, you shouldn’t be afraid to let go of these toxic relationships to make room for clients that will help your company grow in the long run.

Related: Becoming Indispensable to Your Customers