The Big Idea Take a Look at your Customers Profitability

Peninsula Team

January 15 2010

Why not make it your New Year’s resolution to work out which of your customers are actually profitable? Research conducted by Harvard Business School has found that most customers of most companies do not produce an acceptable rate of return (i.e. they are not profitable).

For most companies it seems that the top 20% of customers in terms of profitability produce all of a company’s profits. The middle 60% break even and the bottom 20% lose the company money.

Interestingly, revenue is no indicator of the profitability of the client. More often than not the highest revenue customers tend to either be the most profitable for a company - or the least profitable. If they’re the least profitable, you’ll probably be over-servicing them or giving them overly generous deals or terms - because overall, they are so important to your business revenues.

Taking a look at the profitability of your client base is essential for taking your business forward. It may be that the least profitable clients benefit your company in other ways – they lend kudos to your client list because they are a big brand, for example. If you don’t want to let them go as a client or change the terms on which you operate to try to make the client become profitable - then maximize the intangible benefits they may provide such as pushing them harder for testimonials or referrals.

Some clients may be legacy clients. You’ve had them for years but they don’t make you money any more. However if they are not profitable, it may be time to clear the decks to free you up to focus on the more profitable ones – perhaps by increasing prices or changing your contract terms to encourage them to put up or shut up.  It goes against every businessperson’s instinct to let clients go – but just think what you could do with the additional resource to target more profitable clients in the future?

And as for your existing profitable clients, then consider whether there are other ways you can build your relationship with them further to generate more profitable income from them. But don’t push it too hard - it may well be that if it “ain’t broke, don’t fix it”. Just don’t take them for granted. Take the time to make them feel valued as a client. If you continue to satisfy their needs and provide them with the solutions they want, then they will continue to bring in the profits for your company.

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