Tag Archives | profitable customers

What do you do with unprofitable customers?

Have you ever come across that one customer who you would do anything to get rid of? Have you ever questioned what to do with the customer that causes more strife than good?  Whether they’re a drain or merely a pain, these customers cost you money.  So what do you do with unprofitable customers?

Business is a two-way street. Customers should be as beneficial to you as you are to them. Over time, customers who are not as profitable wiggle their way into your business. How do we find out which customers are profitable and which are not?

Evaluating your customers and how they impact your profitability is just one of the many ways to improve cash flow. Download the free 25 Ways to Improve Cash Flow whitepaper to learn 24 other methods.

Defining Your Profitable Customers

Let’s take a look at your numbers. Does your sales volume reflect the number of customers you spend your time with? More specifically, what are your ratios for the number of transactions and average sale per transaction? If your ratio is pretty high, and your margins are low, that’s a warning sign that it’s time to weed the garden.

Customer Profitability & Cash Flow

Profitable customers have a huge impact on a company’s cash flow. Maintaining customer profitability means managing your costs (and thus cash flow) associated with that particular customer.

1-customer-segmentationThe first step is to manage customer segmentation. Allocate fewer or less expensive resources to those customers that are known for taking advantage of you.

The second step is to measure each customer’s margin. This will allow you to compare each customer and see where you should be spending your time.

The third step is to measure the lifetime value of a customer. This is a KPI that we use and find valuable as a metric for conversion rates.

The fourth step is to manage customer impact.  What would your business look like if you sent this customer packing?

The last and most important step is measure customer profitability.

Customer Profitability Analysis

First, you have to segment your total customers based on your servicing characteristics. This looks at the number of transactions and the sales volume. You can then calculate the profitability of a customer by subtracting your estimated relative cost to service from the revenue for the various segments.

Conduct your customer profitability analysis to start eliminating customers that are costing you money, focusing on those customers that are profitable, and increase productivity in your organization.

But putting the math aside, you should probably look back on the patterns and relationships with those customers… Are your customers rude and putting off certain payments? Are they a pain to deal with?  Do they expect special treatment for a bargain price?

Want to know other ways to free up your cash flow? Access the 25 Ways to Improve Cash Flow here!

Firing Your Customers

Once you determine who your unprofitable customers are, you need to fire them. I know what you’re thinking… “How do I fire someone that brings me money?!” But that’s the problem. They are consuming resources you could dedicate to profitable customers, so they are actually costing you money.

Firing those unprofitable customers opens up opportunities for your more profitable customers. You can spend more time, money, and effort on the people worth focusing on.

Last-Minute Lisa

Let’s say a customer calls you on Friday afternoon and needs an order rushed out by the end of the day. This customer also consumes extra resources because you have to pull extra workers to complete the order quickly.  Unless you charge a premium price for rush orders, this customer is less profitable because they consume more resources. Not sure who these customers are?  Talk to your operations people.  They know.

Slow-Mo Joe

Another customer is always slow to pay their invoices.  In order to collect, your A/R clerk has to make multiple calls and re-send invoices because they “lost” them.  Because they consume more resources than customers who pay regularly, they are less profitable than other customers.  In addition, they constrain your cash because they are slow to pay.

Tiny Tim

Tiny Tim is the customer that only orders in small batches.  Your manufacturing process requires set up time for each order, so small batch orders are less profitable than large orders due to the cost of setting up the machinery for the order.  If you don’t have premium pricing for small orders or include set up time for each order, you don’t make as much money on smaller orders as you do for large orders.

Last-minute orders, delayed collections, and small batches can seem insignificant in isolation, but if a customer continually takes advantage of you, those costs can add up quickly.

Benefits of Weeding the Garden

Increase Productivity

If you continually weed your garden, it allows you to take bite-size pieces in cleaning up. This improves productivity immensely. Use the metrics/steps mentioned above to measure customer profitability and act in real time.

Nourish Profitable Customers

Identify profitable customers. Funnel more resources into those customers that are profitable. Just like soil needs nutrients, your good customers need resources. Avoid nourishing unprofitable customers.

Build a Better Garden

Weeds (unprofitable customers) tend to choke out healthy plants. Build a healthy garden by removing those weeds and unhealthy elements that restrict the growth of your company.

For other ways to improve cash flow, download the 25 Ways to Improve Cash Flow whitepaper to start identifying how profitable customers impact your company.


profitable customers
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Segmenting Customers for Profit

Segmenting Customers for Profit Process

Market segmentation is the process of dividing up the total market based on identifiable characteristics, which have common needs. You can also apply the concept of market segmentation to your customers. For example, you can segment your customers based on the cost to service, the size of the average sale or the number of transactions.

Though segmenting customers for profit or customer segmentation is a simple concept, it is not simple to implement in any meaningful way. The difficult part is identifying the various segments so that you can identify profitable customers versus those that can cost you time and money.

Customer Segmentation – Vertical or Horizontal

Customers may be segmented either horizontally or vertically.

Horizontal segmentation is where you divide customers by industry, geographic location or revenue size.

Vertical segmentation is where you might sell numerous services or products to just one particular type of customer.

For example, you might sell to customers in the construction industry numerous products, such as, steel, lumber and doors to that customer. Though segmenting customers based on market characteristics is useful, you might also segment your customers based on servicing characteristics (i.e.: size of order number of transactions or total sales volume).

Profitability Analysis By Customer

Once you have identified the various segments that apply to your customers you then perform a profitability analysis by customer. Take your annual sales by customer and break it out into various segments. Identify any patterns or relationships which might indicate opportunities for improvement. For example: a large number of small customers or concentration of large ones.

Customer Profitability Analysis

Next, perform a customer profitability analysis by subtracting your estimated relative cost to service from the revenue for the various segments. Estimating the cost to service may be done in general terms on a scale of one to five or in specific terms using activity-based costing. By relating your cost to service to your revenue streams, you can often identify “profit drains” that can be restructured. This restructuring might involve raising prices on select customers, implementing price discounts, sales incentives or firing customers.

If you want to learn how to price for profit, then download our Pricing for Profit Inspection Guide.

segmenting customers for profit

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

segmenting customers for profit


Recommended reading: The Strategy and Tactics of Pricing, Fourth Edition, by Thomas T. Nagle and John E. Hogan

See Also:
Segment Margin
Activity Based Costing vs Traditional Costing
Implementing Activity Based Costing
Profitability Index Method
Net Profit Margin Analysis
Gross Profit Margin Ratio Analysis

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Can You Build Success by Narrowing Your Customer Base?

I recently read an interesting Business.com article by Art Saxby. Art Saxby is the founding principal of Chief Outsiders. In this article, he talks about how to achieve success by narrowing your customer base.  Sounds counter-intuitive… But how many firms tie up valuable resources catering to high-maintenance customers who often don’t stick around in the long run?

Can You Build Success by Narrowing Your Customer Base?

Here’s an excerpt from the article:

Achieving success by narrowing your customer base?

It sounds counterintuitive, but many small- to mid-size businesses can achieve higher profits and more success by downsizing the base of customers they serve.

Creating the perfect situation in which you and your customer base share common goals, respect, and appreciation can alleviate personal and professional stress and allow your business to grow.

Identifying Positive and Negative Customers

Some customers can boost your profits. Others can break your bank. If you don’t know which are which, you’re jeopardizing your business. Many companies could significantly increase profits overnight by either firing troublesome, unprofitable customers or ratcheting the price up so unprofitable customers leave or become profitable.

  • Positive customers truly understand and appreciate what you do. They’re willing to work with you and pay a fair rate for the product or service they receive. When you compare the revenue you receive from these clients to the time spent for their continued business, you should find a fair and practical balance.

While every customer or client cares about price, your positive customers understand the value you bring to their businesses. You understand the issues they have with growing their businesses and you talk to them about ways you can help; they, therefore, understand and value what you do.

  • Negative clients, on the other hand, can tax both your business’s operations and finances. For many companies, there’s a constant push to sell whatever can be sold to whoever will buy it. The business appears successful, and salespeople and operations stay busy in this scenario.

However, these customers can actually cost your company money, without really understanding or valuing the benefits of the product or service you provide. Your sales team might have lured these customers in with big price discounts or unrealistic delivery commitments to close the initial sale.

Negative customers often kill profitability by tying up valuable resources, like customer service time, engineering, or inventory. In many cases, these high-maintenance customers leave before you even recover your startup costs.

When is it Time to Narrow Your Base?

One of the biggest clues that your company is spreading its net too broadly in terms of customer base is when most new sales are closed due to low prices and discounting. To sell to a wide audience, a product or service must have broad appeal.

However, if everybody likes your business, but nobody loves it, you are forced to compete on price. By trying to reach everyone, you meet a bit of everyone’s needs, but not enough of anyone’s specific needs for them to pay you a premium. It’s also possible you’ve loaded up your product/service with things customers don’t care about and aren’t willing to pay for.

Analyze Your Sales Team’s Invested Time

Analyze your sales team’s invested time. This process can reveal which customers take up the majority of your business’s efforts. Often, a salesperson will cater to certain companies or segments and have specific product lines she likes to push. It’s a natural tendency to gear your efforts toward your interests, but this approach can really inhibit a company’s growth.

The likes and dislikes of a salesperson can actual control a company’s growth. If everyone is only focusing on what they consider their specialties, productivity and shared goals can suffer.

Focusing on price versus quality, and on isolated sales efforts versus a unified vision, can weaken your customer service and profit potential.

Companies can increase profitability by avoiding unprofitable customers. Clients only interested in price are often unfit for long-term business relationships.

The original article can be found here.

To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

Narrowing Your Customer Base

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to manage your company before your financial statements are prepared.

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Narrowing Your Customer Base

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