Customer-centric business is all about understanding the entire value exchange between you and your customers – and that extends to profitability. Understanding customer profitability helps you identify how you can improve your service offerings and ultimately improve your customer relationships.
And yet only 45% of companies worldwide actually measure it. This is perhaps because it’s quite a tricky metric to pin down; it can vary wildly, depending on different profit attribution models and assignment of costs to customers.
But that doesn’t make it unknowable. With a good appreciation of a few main areas, any business can keep a good grasp of customer profitability.
Not all customers are created equal. In fact, in most businesses, 20% of customers create 200-300% of all annual profit – while the remaining 80% eat into it by 100-200%. But customer profitability isn’t purely about showing which customer relationships are better than others on paper. It represents a huge advantage for organisational performance and self-knowledge more generally.
Understanding customer profitability lets you:
In essence, the customer profitability metric just applies the basic formula for profit to your client relationships:
Profit = Revenue – Expenses
It’s the difference between the revenue a customer earns you and the costs they impose during a given period. So at its crudest:
Customer profitability= earned revenue – customer costs
Looking purely at the numbers, a profitable customer is one whose revenue stream exceeds the costs of onboarding, servicing and keeping them.
There are a range of customer costs involved in your services, which is part of the reason why quantifying customer profitability is so difficult. Tracking all your project work is a great way to make all the of the tasks that go into serving your customers visible. A few of the common costs to keep your eye on include:
Only once you’ve studied these costs can you work out what you need to change. And that doesn’t necessarily mean writing off a customer – often unprofitability is the result of pricing errors, because companies lack accurate records of time or adopt a one-size-fits-all approach to their services.
As the saying goes, what gets measured gets managed. There are a ton of different methods you can use to measure customer profitability, which balance historic Activity-based costs (ABC) with predictive customer lifetime value (CLV). But unless the customer information you are feeding into your calculations is accurate, the usefulness of your results is highly questionable.
Tracking direct and indirect customer costs is notoriously difficult, but understanding how you spend your time across your customers each day is a great place to start. Automatic time trackers like Timely offer this by giving you full visibility over everything you work on for a customer. They track all the work you do on desktop and mobile and use AI to assign different activities to correct client.
Intelligent tags help you split out all the different work that goes into a client, and with the help of project budgets, you can clearly identify billable from non-billable work. Since everything is tracked automatically, no detail slips through the cracks – unlike manual recording, you can be confident that you have a fully accurate record of all your business activity for a customer.
You can’t use metrics alone to properly judge the profitability of your customers. Qualitative information is only one side of the picture, and your profitability scores should be treated as methods, rather than ends in themselves. It may be that an “unprofitable” client on paper yields other benefits which make them profitable in other ways. These can include:
Remember, good customer relationships require effort from both sides. Truly customer-centric business are sensitive to the needs of different customers, recognizing and trying to accommodate their individual needs as much as possible. It’s about recognizing potential and addressing your own inflexibilities – even if a customer is unprofitable now, they may become invaluable in future.