2♣️ Find your profit sweet spot: Prioritise profitable customers

Ever feel like you're working long hours but not seeing the profits you deserve?  Many businesses prioritise revenue growth, neglecting the crucial aspect of profit margin.  This can lead to a scenario where you're serving a large customer base but not generating significant income.

Problem or Challenge

The challenge lies in identifying your most profitable customers.  Traditionally, businesses focus on revenue generated, with the assumption that bigger clients equate to bigger profits.  However, this is often not the case.  Large customers can negotiate lower prices and require more service, squeezing your profit margin.

Complexity

The complexity lies in understanding the true profitability of each customer relationship.  It's not just about the revenue they generate, but also the cost of servicing them and the negotiation power they wield.

Solution: The Customer Profitability Curve

The Customer Profitability Curve is a powerful tool for identifying your most valuable customers. Here's how it works:

1. List Your Customers: Create a list of all your customers, ordered by size (revenue generated). This is typically depicted as a graph with revenue on the vertical axis and customer size on the horizontal axis, forming a bell curve.

2. Shift Your Focus: Instead of plotting revenue, plot the profit margin you earn from each customer. This reveals a different picture.

3. Identify the Sweet Spot: Often, you'll find that your most profitable customers are not the biggest spenders. They tend to be medium-sized clients who offer a good balance between revenue and service costs. They negotiate fair prices and don't require excessive hand-holding.

Benefits

Implementing the Customer Profitability Curve offers several benefits:

• Improved Profitability: By focusing on your most profitable customer segment, you can allocate resources more effectively and increase your overall margin.

• Better Customer Targeting: The curve helps you refine your marketing and sales efforts to attract more ideal customers.

• Strategic Pricing: Understanding customer profitability allows you to set prices that reflect the true cost of service.

Why it Works

The Customer Profitability Curve works because it shifts the focus from vanity metrics like total revenue to a more nuanced understanding of customer value.  By identifying your most profitable customer segment, you can tailor your approach to maximize the return on your investment.

Measurement

The effectiveness of the Customer Profitability Curve can be measured through various metrics:

• Profit margin: Track your overall profit margin after implementing the strategy.

• Customer acquisition cost: Monitor the cost of acquiring new customers in your ideal segment.

• Customer lifetime value: Calculate the average revenue generated by a customer throughout their relationship with your business.

My Story

I picked up this tip relatively recently from Julie Holmes, a MD2MD speaker. This is definitely something I wish I’d known earlier in my career.  In fact I think I did know it instinctively as I remember arguing the case for walking away from unprofitable large customers a few times. Indeed I remember the stress I felt when making what felt like a very brave (or foolhardy)  decision to walk away from a £1M contract.

Don't be afraid to look beyond the big spenders.  The Customer Profitability Curve can help you uncover the hidden gems within your customer base.  Analyse your customer data, identify your sweet spot, and reallocate resources to maximise your profitability.