How many of your clients are profitable? You might think they all are, especially if your overall business is consistently in profit.
But when you break it down, you will more than likely discover that a significant portion of your client base are not as profitable as you assumed.
One of the mistakes business owners make is to confuse a client’s impact on revenue with their impact on profit. It’s entirely possible for your client to be filling your top revenue line without touching your bottom line, and this can be a problem.
The 80/20 rule has been applied to business for decades, and originated when Italian Economist Vilfredo Pareto suggested 80% of the land in Italy was owned by only 20% of the population. The same principle applies to customer profitability – 80% of your profits are being generated by 20% of your clients. One way to discover who is having the greatest impact is to complete a regular client profitability analysis.
Running a client profitability analysis
A client profitability analysis very simply highlights which clients are delivering (or exceeding) expected profits, and which one’s aren’t. Going with your gut won’t be reliable enough, so set aside some time once a month (or every quarter at the very least) to look at this objectively. As well as measuring gross profit, you might want to consider valuable factors such as the number of new business referrals you get from them. One of the most important considerations will be how much time you’re wasting on clients, because this will have a devastating effect on your bottom line.
Profitable clients won’t waste your time
How much is your time worth? This is an important question, because every minute you spend chasing a client for unpaid invoices, email responses or meetings, the more time (and money) you’re wasting. A profitable client won’t leave you hanging for weeks on end, or delay in paying. In fact, you should expect the opposite – a client worth your time is one that communicates proactively and delivers consistent messages. Consider these issues against each of your clients and discover who might be eating up too much of your time for very little return.
Existing clients generate more profits than new ones
An ongoing business relationship with your clients will ensure maximum profits. In fact, raising your customer retention rate by just 5% can boost your profits by up to 95%, and the longer a client stays with you, the more they’ll spend. Interestingly, 40% of ecommerce business comes from existing customers, which, according to one study, make up only 8% of the overall customer landscape. So what does this tell us? While new business has ample benefits, investment must be made into communicating with existing clients in order for them to continue to purchase from you.
What should happen to unprofitable clients?
Once you’ve identified the clients that do very little for your bottom line, you should take action to end the relationship. But this doesn’t mean cutting them off, as such. Referring them to a more appropriate service will have two positive consequences. Firstly, they won’t feel abandoned, and will appreciate your interest in keeping them connected. This will increase the likelihood of them giving you a positive testimonial. Secondly, it’ll keep the relationships within your network strong, and, in return for sending a client to another business, you might receive a far more profitable client in return.
If you’d like to talk more about your profitable (or unprofitable) clients, or need assistance in completing a client profitability analysis, book an appointment today.