Weeding out your less profitable customers

John Walters

John Walters

Weeding out your less profitable or even unprofitable customers pre-supposes that you understand your customer account profitability.

Customer account profitability is something that many businesses struggle with. From recording actual materials and labor used on a particular job, to allocating fixed costs in a way that makes sense, and or developing systems that can manage the data in a timely manner.

As such, customer account profitability is often tackled as an ad hoc exercise because systems are generally not geared up to automatically capture this data.

The fact that it may not be easy to calculate your customer account profitability should not deter you from making the effort.  Without a reasonable overview of your customer account profitability you are flying blind, meaning that it is very difficult to set about effectively managing your customer portfolio.

Be aware of customers that make a contribution to fixed costs, but not sufficient to generate a profit.  It is rather obvious that you cannot build a profitable business if all your customers fall into this category, and yet we are sometimes reluctant to tackle these accounts for fear of losing the contribution that they bring.

It’s important that you understand the financial consequences of potentially losing an account before you seek price increases in an attempt to move the account into a profitable situation. Remember that if your customer walks then your fixed costs will need to be covered by fewer customers, and so the fixed cost per customer will actually increase.

Not withstanding the above discussion on fixed costs, weeding out your unprofitable customers through increased pricing can be a very effective way to improve your profitability. If you attempt to increase prices and your customer stays with you then great, but if they walk, you will still have improved your profitability.

Good luck in weeding out your unprofitable customers.

Should you need help to develop customer account profitability for your business so that you can effectively manage your portfolio you should contact “121”. We have the tools experience and we are there to help you.