Outsourcing vs. Losing A Customer

May 23, 2023

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 simply 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 still 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 in the first place, saving the customer for future sales is of utmost importance.

Comparing the Two Transactions

Outsourcing and losing a customer are two different things that can have a significant impact on a business. Outsourcing is the process of 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 a number of 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 will be provided by the third-party vendor, and the impact that saving or losing the customer will have on the business.

Although some small businesses might think that the only alternative of 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 loyalty of the customer. 

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 that can 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 both 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 a business cannot meet its needs, then the business should certainly consider outsourcing as an alternative in order to keep the customer even with a reduced profit. Some profit is better than no profit which is what 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 needs to have a clear strategy in place that takes into account the customer’s needs, preferences, and expectations. At times, a business might not be able to fulfill everything that a customer needs or wants. Outsourcing can be a great way for a business to achieve its goals of providing the best satisfaction to customers whether that is 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 relationships with customers even if outsourcing is part of the answer.

The Final Decision

Ultimately, the decision of whether to outsource or lose a customer is a complex one that should be made on a case-by-case basis. Businesses should carefully weigh the pros and cons of each option before making a decision.