How to Protect Your Business From Customers

This is a guest post by Tim Berry, GBR Editorial Review Board member and President of Palo Alto Software

What? You say, reading my title here. Why would I want to? Here’s a question I received in the www.bplans.com Ask the Experts forum today:

My business sells window coverings and recently got taken by a client who decided to forgo paying for the balance due for product that was installed in his home. We often deal in large-value custom orders and need to protect ourselves in the future. What kind of agreement or contract can we use, and were can we find an example of something that will hold up in court? Should we use a lien agreement?

Ok wait. Let’s talk about this. Have you considered the impact on your business of asking all your customers to sign something like that? You’re selling window coverings. You have competition.

You just reminded me of my post last month The Heat, the Kitchen, and Credit Cards. I was mad at a customer who stole from us, and customer service for the credit card helped me out.

The active point in that was about the heat and the kitchen. You’re in business. You’re dealing with customers.

You have to decide whether the occasional bad apple is worth baking all of the apples as they come in.

Here’s a good exercise:

  1. Estimate your average monthly sales.
  2. Estimate your average monthly sales after you impose safeguards to protect your business from your customers.
  3. Subtract the number in point 2 above from the number in point 1.
  4. Is the result more or less than what your bad customers cost you in an average month?

Here it is in practice. An actual case, from something that happened in Palo Alto Software in 1999. Some of our non-US customers were making orders and then not accepting shipment, costing us money. Our accounting goddess wanted to make all non-US customers sign a form and fax it back so we could charge them anyhow. Without a signature, we were stuck.

  1. The average non-US sales per month at the time were about $35,000.
  2. We estimated that if we had every non-US customer sign a form and fax it back before shipping, our sales would go to about half of that, $17,500.
  3. The problem we were solving was costing us about $350 per month.

Hmmm. That’s a real case, with real numbers, from back then. Think about margin for error, too. Perhaps we estimated wrong, and our sales would have dropped only, say, 10 percent instead of 50 percent. Even in that case, the cost would have been $3,500 per month to correct a $350 per month problem.

So, getting back to the question, you asked: if you really want to protect yourself from your customers, that’s a question for an attorney. And good luck. First, think it through.

This post originally appeared in Tim’s blog, Planning Startups Stories, on February 4, 2008.


Related in the Graziadio Business Report

Calculating the Strategic Value of Customer Satisfaction by Chic Fojtik, PhD

Cultivating the Customer Asset William Bleuel, PhD

Author of the article
Tim Berry, GBR Editorial Review Board Member
Tim Berry, GBR Editorial Review Board Member
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