Our Mission is to guide our clients to make better informed, and therefore far more effective strategic and tactical decisions which either make or save the company money.
It’s common sense that a company’s most senior executives do all they can to mitigate or avoid unprofitable customers and unnecessary internal activity, yet even the most savvy leaders are mesmerized by the human and institutional bias to capture all possible revenue.
This article is the first in a series of articles that explores the topic of individual customer profitability, where we’ll cover our findings:
All profitable businesses should examine their customer profitability every 3 years. Given how few companies do it at all, this might appear as a particularly bold suggestion. Here’s why it makes sense: There are a tremendous number of internal and external forces which affect your company’s overall economics over the course of 3 years, and the financial benefit of repeating a customer profitability analysis always offsets the resources and cost required to conduct the exercise.
Setting aside our suggestion to make a customer profitability exercise a routine, let’s look at why even those companies who would benefit most, often object under what ultimately is false rationale. The 3 most common objections we hear:
Companies that have examined their customer profitability and effectively acted on the findings normally add to EBITDA by as little as 3%, and up to 10%! In addition to the strength yielded from greater earnings, a more subtle and powerful strategic outcome is the effective creation of a competitive weapon: In cases where no adjustment to policies or practices make a customer profitable, and when these same underlying economics likely apply to your competitor, “gifting” an unprofitable customer to your competitor (who as stated above is likely not aware of their customer profitability) is not only a sound business decision for you, but funnels problematic customers to your competitor.