Your Best Customer Might Be Your Worst
The short answer: customer profitability is what each client actually leaves you with once you count everything they cost: hours over scope, senior time, old discounts, the cost of looking after them and the cost of waiting to be paid. Ranked by profit rather than revenue, your client list rarely looks the same, and your biggest customer is often not your best.
The short version
- Management accounts show margin as an average, and averages hide a handful of clients at 15% being carried by others at 65%.
- The cost of a client hides in five places: the rate you actually achieve, out-of-scope work, senior time, the cost of looking after them, and the cost of getting paid.
- The most useful single number is the effective day rate per client: what they paid divided by the days your team actually spent.
- Before dropping a client, separate contribution from fully loaded margin. Positive contribution usually means reprice, not fire.
- Exercise: rank your five biggest clients by effective day rate instead of revenue.
Every business has one: the client whose logo is on your website, who comes up in every pitch, and whose managing director has your mobile number. They’re the biggest line on the sales ledger, and nobody in the team would dream of losing them.
Now try a different question. If you added up everything that client costs you (the hours over scope, the senior time, the discount you agreed three years ago and never revisited, the extra month you wait to be paid), how much would be left?
For a lot of the founders I work with, the honest answer is that they don’t know. Ranking clients by revenue takes a minute. Ranking them by profit takes some work, and the two lists rarely match. The gap between them is very often where a growing business’s margin has gone. (Babylon Health is the extreme version.)
Why your management accounts don’t show customer profitability
Your management accounts show gross margin for the business as a whole, or perhaps by service line. That’s an average, and averages are very good at hiding things. A business making 45% gross margin overall can easily have a handful of clients at 65% carrying two or three at 15%, and the monthly pack will still look perfectly respectable.
At £1M you probably know which clients are hard work, because you’re the one doing the work. By £3–5M there are thirty or forty clients and an account team in between, and the founder’s sense of who’s profitable tends to come down to who’s pleasant to deal with. By £10M the data usually exists, in the timesheets, the CRM and the sales ledger, but nobody has joined it up.
Where the cost of a client hides
When our CFOs build a client-level P&L for a business, the costs that never reach a client’s line usually turn up in five places.
The rate you actually achieve. The rate card says £950 a day. Then there’s the volume discount, the write-off on the job that overran, and the “we’ll absorb that one” at the end of a project. Divide what the client actually paid by the days your team actually spent, and the effective rate is often a long way below the card. The effective day rate per client is the most useful number in this whole exercise.
Work outside the scope. The extra round of amends, the “can you just” email, the report that was meant to be quarterly and somehow became monthly. Each one is small, and none of them gets billed, because nobody wants to send an invoice for a favour.
Senior time. Plenty of businesses cost a project on the delivery team’s hours and leave out the directors and the founder, because their salaries sit in overheads. If your biggest client takes up a day a week of the founder’s attention, that’s a real cost, and it belongs on that client’s line.
The cost of looking after them. Weekly status calls, bespoke reporting, their procurement portal, onboarding every new person on their side.
The cost of getting paid. A client on 60-day terms who pays in 90 is borrowing from you, and in a growing business that money has a cost, whether it’s the overdraft or the hire you put off. Then add the hours spent chasing, raising purchase orders and resubmitting invoices to a portal that rejected the first one. (Your rights on late business payments.)
Each of these is small enough to wave through on its own, which is why they survive for years. Put them together against one client and a headline 45% margin can end up much closer to break-even.
Before you drop an unprofitable client
This is where people go wrong in the other direction. When you find an unprofitable client, it’s tempting to fix it in one go by letting them go, and sometimes that’s right. But the overheads they were helping to pay don’t leave with them. Your rent, your finance team and your directors’ salaries stay where they were, spread across fewer clients.
So look at two numbers. Contribution is what’s left after the costs that would genuinely disappear if the client did: delivery hours, freelancers and direct expenses. Fully loaded margin is what’s left after a fair share of everything else as well. A client with a poor fully loaded margin but healthy contribution is helping to pay your rent, and usually needs repricing rather than firing. A client with negative contribution is costing you money every month you keep them.
Once you know which is which, you have four sensible options. You can put the price up (the rise you’re too scared to make), cut the scope back to what they pay for, or change how you serve them, with fewer meetings, standard reporting or a more junior team. If none of that is possible, you can hand them over gracefully and use the capacity on a client who values it.
How it usually goes wrong
The anchor client is the classic one. Their rate was agreed when the business was half the size, it has barely moved since, and nobody wants to be the person who raises it with the biggest account in the building.
Then there’s the client kept for the logo, long after the logo stopped winning anyone any work.
And the one that surprises people most is the small, low-maintenance client nobody pays much attention to, who turns out to be the most profitable account in the business and would happily buy more if anyone asked.
Where does your biggest client sit?
Take your five biggest clients by revenue over the last twelve months, and for each one write down:
- What they paid you over those twelve months.
- Roughly how many days your team spent on them, including the directors. Use timesheets if you have them, and an honest guess if you don’t.
- What they paid divided by those days. That’s your effective day rate.
- How long, on average, they take to pay you.
Then put them in order by effective day rate instead of revenue. If the order changes, and especially if your biggest client has slid down the list, that’s a conversation worth having before your next budget is signed off.
The client profitability ranker
Paid subscribers to The Scaling CFO get Toolkit 02, the client profitability ranker: a spreadsheet for up to 25 clients that works out the effective day rate, contribution and fully loaded margin for each one, ranks them, and flags which to keep, reprice or review. Subscribe to The Scaling CFO.
If client profitability is the one you keep meaning to get to, this is exactly the work our CFOs take on. WrightCFO is a practice of fractional CFOs: experienced finance people who work alongside you for a few days a month, build the client-level reporting that shows where the margin is going, and help you plan the pricing conversations that follow. If that’s useful, book a 30-minute call with me.
— Sophie
Frequently asked questions
What is customer profitability analysis?
Working out the profit each customer generates after all the costs of serving them, including delivery time, senior and founder time, out-of-scope work, discounts, account management and the cost of slow payment, and then ranking customers by profit rather than revenue.
How do I calculate an effective day rate?
Divide what a client actually paid you over a period by the number of days your team, including directors, spent on their work. Compare it with your rate card to see how much discounting and unbilled work is costing you.
What is the difference between contribution and fully loaded margin?
Contribution is what a client leaves after the costs that would disappear if they left, such as delivery hours and direct expenses. Fully loaded margin also deducts a fair share of overheads. Positive contribution with a poor fully loaded margin usually means reprice rather than drop.
Should I drop an unprofitable client?
Only if their contribution is negative and repricing, rescoping or changing how you serve them won’t fix it. Dropping a client with positive contribution can make overall profit worse, because your overheads stay the same.
Why don’t management accounts show client profitability?
Because they usually report margin for the whole business or by service line, and many client-specific costs, such as senior time and payment delays, sit in overheads rather than on each client’s line.
This article was first published in The Scaling CFO, Sophie Wright’s fortnightly newsletter for founders between £1M and £20M. Subscribe free. Related reading: S4 Capital and agency staff costs.
Sophie Wright is the founder of WrightCFO, a UK fractional CFO practice. WrightCFO provides fractional (part-time) Chief Financial Officers to founder-led and private equity-backed businesses, typically between £1M and £20M in revenue, scaling towards and beyond £10M. The practice specialises in cashflow forecasting, margin and pricing, investor-ready reporting, post-acquisition integration and exit readiness, across the technology, creative, media, professional services and not-for-profit sectors. WrightCFO works alongside clients’ existing accountants rather than replacing them.
