Businesses are in the habit of measuring many things: customer satisfaction, financial performance, staff performance, market share and share value to name a few. And then there are hundreds of key performance indicators out there. David Parmenter has some books on the subject, in which he describes an endless number of them.
But I think, one of the most powerful things you can measure is client profitability. Because frankly, all clients are not created equal. There are various methods to conduct a CPA (Client Profitability Analysis) and it does depend on your industry. If you are a service business such as advertising, you will want to use time sheets to be able to know where your greatest assets (your staff) are spending their time. Or if you are in the business of conducting property inventories, then you need to identify all costs associated with a job, typing costs per report, time it takes per rooms in a property etc, in order to properly calculate your margins.
When I conduct a CPA, I investigate client income, associated labour and product costs and compare margins and growth opportunities between clients. The results are piled into a number crunching, sorting, filtering, moveable, living and breathing, data filled, excel spreadsheet. It’s a beautiful thing. From here, the analysis begins. Clients are then plotted onto a matrix. The results of which might clarify, for example, that Client A brings in a margin of 5%, but it brings in 50% of your revenue and Client B brings in a healthy margin of 25% but you only ever sold one item to them and they don’t look like they want to return. The wonderful thing about this analysis is your clients are categorised and according to that category, an appropriate strategy is allocated. Here is an example:
The result is a written report or presentation whereby I reveal which of your clients are the most and least profitable, not in terms of income, but margin and volume. It is a powerful analysis which often leads to a change in client strategy. I will assess which clients, according to my analysis, you should aim to grow because they reap higher margins or which clients should be maintained with minimal effort, for example.
“A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both” Michael Porter 1996. “What is Strategy”, Harvard Business Review (Nov-Dec)
I have never conducted such an analysis, without management immediately making strategic changes to their business. If you want to grow your business, become more profitable and pose a bigger threat to your competition, a client profitability analysis is a must. Without it, you are driving your business blind. Regain control.