Most businesses know their total turnover and overall profit, but fewer know how much profit they make from individual customers.
This distinction can be important.
A customer spending £50,000 a year may initially appear more valuable than one spending £20,000. However, the larger customer may demand discounts, require frequent meetings, pay slowly and generate considerable administrative work.
Once these additional costs are considered, the smaller customer may actually be more profitable.
Start by reviewing the gross profit generated by different customers. Then consider the resources required to service them. How much employee or management time is involved? Are there delivery costs, special requirements or repeated queries? Does the customer regularly pay late?
Some of these costs will be difficult to calculate precisely, but even an approximate analysis can be revealing.
Customers can then be divided into broad categories. Which are profitable and straightforward to service? Which generate good turnover but disappointing profits? Which relationships could be improved by changing prices or terms?
This does not mean automatically abandoning less profitable customers. There may be strategic reasons for retaining them, or profitability might be improved through better pricing, greater efficiency or changes to the service provided.
The exercise can also help with marketing. Once you know the characteristics of your most profitable customers, you can concentrate more effort on finding similar ones.
Sometimes increasing business profits is less about finding more customers and more about understanding the customers you already have.
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Published by The NAS News Team
