Perfect Pitch – Sales Institute Journal 2010

Are all your customers profitable?

It came as an enormous surprise to a sales director of a major corporate company, when he discovered that his biggest clients were losing the company money. All that time spent negotiating deals with these particular clients to keep them on side – delivering the goods to tight deadlines, providing service above and beyond, building relationships with key decision-makers – all yielded a high revenue but not a profitable revenue.
For anyone engaged in selling, the crucial question is: Can you tell which of your customers are profitable and which ones actually cost you money to serve?

Company executives are taking a more sophisticated look at customer profitability and in particular cost-to-serve as a driver for business growth.

There is a generally held view that the Pareto Principle also known as the 80:20 Rule holds true for all businesses: 80% of profit is derived from 20% of customers. However, new light is shed on customer profitability by Professor Robert Kaplan, of the Harvard Business School and his research shows that:

  • The most profitable 20% of customers deliver between 150% and 300% of profits
  • The middle 70% of customers are at breakeven level and
  • The least profitable 10% of customers lose the company between 50% and 200% of total profits.

This means that often, some of your largest customers turn out to be the most unprofitable. The Whale Curve is a useful graphic to illustrate how this works.

The high profitability of the top tier of customers balances out against the unprofitable lower tier of customers so that you achieve your 100% profitability figure.

There are serious implications for a company that cannot measure and manage customer profitability.  These can include:

  • Breakdown in relationships between customers and suppliers.
  • Excessive demand by customers for free services or heavily discounted products.
  • Over-servicing of unprofitable customers, due to lack of information.

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