What does a business do when it cannot provide a particular product or service needed by a customer? The easy answer might be to advise the customer that the business cannot meet its needs and lose the customer to a competitor. The more difficult decision might be to find another business to supply a needed product or contract out the desired services while retaining the customer for future sales. Although the net profit on this particular type of transaction will certainly be less than if the company could have supplied all of the products or services to its customer first, saving the customer for future sales is paramount.
Comparing the Two Transactions
Outsourcing and losing a customer are two different things that can have a significant impact on a business. Outsourcing is hiring or contracting with a third-party vendor to provide certain products or perform certain services that theoretically could be done in-house. Losing a customer, of course, is when a customer decides to take their business elsewhere.
There are several factors that businesses should consider when deciding whether to outsource or lose a customer. These factors include the contracting cost to be incurred, the quality of the product or service that the third-party vendor will provide, and the impact that saving or losing the customer will have on the business.
Although some small businesses might think that the only alternative to not being able to provide a particular product or service to an existing customer is to lose the customer to a competitor, outsourcing may be the best option for the business. The customer is currently satisfied with needed products or services while the business retains the customer’s loyalty.
Associated Risks
There are some risks associated with outsourcing that must be considered:
· The customer may not be pleased with the quality of the product or service provided by the third-party vendor.
· The potential impact on the business’s reputation.
· The importance of the customer to the business.
· The cost of losing the customer (future sales).
· The ability to find a third-party vendor to provide the products or services needed.
Strategic Decision
While both situations can result in a loss of revenue when a company cannot provide needed products or services to a customer, contracting out is a strategic decision made to satisfy the customer while avoiding losing the customer and future sales forever. Maintaining a good relationship with the customer and potentially retaining the customer can be strategically important to the future of a business and prospects for additional sales.
When to Outsource
If a customer is likely to take its business elsewhere if it cannot meet its needs, then the business should consider outsourcing as an alternative to keep the customer even with a reduced profit. Some profit is better than no profit, which happens when a business loses a customer for good. The key is to weigh the outcome of outsourcing against the potential cost of losing a customer.
Retaining Customers while Outsourcing
To ensure customer loyalty, a business must have a clear strategy that considers the customer’s needs, preferences, and expectations. Sometimes, a business cannot fulfill everything a customer needs or wants. Outsourcing can be a great way for a business to achieve its goals of providing the best customer satisfaction, whether via primary products or services or outsourcing some functions while maintaining oversight and communication with the third-party vendor. It is important to focus on building customer relationships, even if outsourcing is part of the answer.
The Final Decision
Ultimately, deciding whether to outsource or lose a customer is complex and should be made on a case-by-case basis. Businesses should carefully weigh each option’s pros and cons before deciding.
