Every business on Earth has growing profit as “JOB #1”. If you’re a business where profit has flattened, dropped, or only incrementally increased over the prior three years, your business’s overall health and profitability are at far greater mid and long term risk. In these scenarios, while counterintuitive to some leaders, knowing and managing each individual customer’s profit contribution to your company is paramount to your ongoing well being and to invest in growth (and adhering to the B-school 101 lesson: “you can’t cost cut your way out of a sales problem”).
While lack of knowledge on customer profitability is virtually an epidemic amongst your peers and competitors, it’s not a “far flung” or arcane topic. In fact, simply by knowing revenue per individual customer over time (an easier calculation), you can determine the degree to which you company suffers unprofitable customers, and whether closer analysis is appropriate. To perform this simple calculation:
- Have your previous 3 year, Y/E revenue totals in front of you.
- For each of the prior years, carefully calculate the number of customers you invoiced in that year…all of them…regardless of size.
- For each year, calculate the “average size” of your client base.
- For each year, calculate the “median” size of your client base.
- Compare the total number of clients invoiced in each prior year.
- Finally, calculate the 3 year trend of both the “average” and “median” size of your client base.
To be clear, this calculation does not yet get to the profitability of each customer, but it is highly suggestive of the extent to which unprofitable customers are affecting your performance.
If you are one of the rare companies where all these top line metrics have steadily improved over the prior years, then you don’t need to read beyond here. Simply put, we applaud you. However, if you’re one of the 90% of companies where both the average and median value have dropped, then you have a serious problem.
What it reflects is your company has been chasing revenue for small incremental growth and its sending you down a rabbit hole. Even worse, if you believe your organization is at 100% capacity, and have added headcount “to keep up” with the load, we can virtually guarantee your net income has suffered. By definition, you’re fueling your company’s in-efficiency. Further, you are putting your company at a competitive disadvantage.
Knowing the profitability of every customer, new and old, will be a real eye-popping experience for you. More importantly, it will arm you with facts you don’t know now, and will provide you important information which your less sophisticated competitors don’t have…putting you at a significant competitive advantage. This simple exercise, when completed, promises to improve both your P&L and operational efficiency, and likely even strengthen your capacity utilization.
To learn more about customer profitability initiatives, background and methodologies, you are welcome to contact us. It is certain to be worthwhile and enlightening!
