Identify and Develop your Most Profitable Customers

All customers are not created equal: For most businesses, a small percentage of customers drive a major percentage of profits. Other customers, while generating cash flow, can actually cause your business to lose money on each transaction. And your biggest customers may not necessarily be your best customers. Your goal is to focus on growing sales with your most profitable customers, finding ways to increase profits on less profitable customers… and possibly to let unprofitable customers take their business elsewhere (painful as that may seem).

The key is to first analyze each customer: How much they spend, how many resources their business ties up, and most importantly the profits you make on their business.

Individual Customer Analysis

Let's start with analyzing each of your customers. To make the process easier, start with one of your smallest customers; gathering data will be simpler. For that customer, determine:

• Total spending per specific period of time. Use weekly, monthly, or yearly figures; choose a time period that makes sense for your type of business.
• Cost of goods or services provided. For now, leave out fixed costs like rent, utilities, and other overhead. Focus on the actual cost of the goods provided or your direct costs to provide a service.
• Cost of additional "services." Some customers require more administrative or sales support than others. Evaluate this customer against your "average" customer: Do they call more frequently to check on order status? Do they tend to return more products? Do they require unusual administrative processes? Capture the additional cost (if any) of servicing the customer. (You may be surprised what hidden costs you find, especially in regards to your "best" customers.)

Then do the math. Subtract the cost of servicing the customer from the gross revenue received. The result is your profit margin for that customer – again, leaving out overhead and fixed costs.

Then evaluate each customer using the same basic methodology. The end result is a breakdown, by customer, of profitability.

Factor in Other Variables

In theory you should then focus on growing the most profitable customers, but of course it's not that simple. Other factors do play a part; a less profitable customer can still provide tangible benefits like:

• Signing long-term contracts and agreements.
• Purchasing a variety of products or services.
• Providing referrals or enhancing your business image through association. (Being able to say, "We provide services to the University," for example, may help your salespeople close other deals.)
• Enabling entry into growing markets or market segments.

For example, say you run an engineering firm. A large customer contracts for electrical engineering services; they have negotiated a relatively low rate, making them less profitable… but if the constant flow of work allows you to keep a full-time electrical engineer on staff, thus letting you take on smaller but much more profitable jobs… keeping the large customer, even if margins are relatively low on their work, could make perfect sense. And if you are their provider of choice that could dramatically improve your firm's reputation in your area and make winning other business much easier.

Change Your Focus

Once you have determined your most profitable customers – and your least profitable customers – then adapt your strategy accordingly.

First look at your least profitable customers. Do you lose money on any? If you're like most companies, you probably found at least a few customers that negatively impact profit margins; if so, consider letting them go, raising prices to more profitable levels, or changing how you service them so that you can make a profit on their business. In some cases all you may need to do is find ways to reduce the cost of "additional services" (like non-legitimate support calls) so your total costs for servicing that customer are decreased and your profits automatically increase – without raising prices.

Then focus on your most profitable customers. How can you increase the amount of business you do with those customers? Can you sell additional products or services? Should you offer different payment or service terms to encourage greater spending? Most importantly, look closely at what makes this group profitable, and try to apply what you learn to your "average" customers.

Your ultimate goal is to change how you deal with customers at each level: Least profitable, most profitable, and "average." Work hard to convert average customers into more profitable customers and least profitable customers into average customers. But no matter what, take great care of your most profitable customers – they are the lifeblood of your business.