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Biggest isn't necessarily best
It is easy to assume that your most profitable customers are those that buy the most of your products or services in revenue terms. However, that doesn't take into consideration the mix of products and services that they buy (different products and services generate different margin levels) or all of the costs involved in servicing those customers.
For example, it might easily be the case that your biggest customer generates a relatively poor level of net profit because they consume a large quantity of a low margin product. Similarly, another customer may purchase a large volume of a high profitability product, but erodes all of that profit through a high cost of servicing because they are very demanding of your time, expect exceptional discounts, rarely pay invoices on time, require specific documentation, and so on.
Take a closer look
To find out which customers really generate the most profit you will need to do some simple analysis.
Start by looking at the profit potential on each of your product and service offers and rank them accordingly. Make sure that you include your normal costs of sale and average discounting levels in the calculations so that you are working with 'real life' figures.
Second, look at your customer list and work out the real cost of maintaining their current purchase levels. Here you need to consider the individual characteristics of each customer and account for exceptions to the norm, especially those that are most demanding and those that are generally poor payers. You can then rank the customers by their cost to serve.
The final step is to combine the real life profitability of your offers and the cost to serve of each customer with the purchase volumes that each customer makes. This will quickly identify which customers really are generating the most profit ... and which aren't.
Memorable marketing
Apply the insights gained from the analysis above to your marketing and you can focus on attracting the right profile of customer to your most profitable products or services. Thinking and working creatively like this will help you to make your marketing more memorable so that it better supports your business ambitions. This means that customers will be able to differentiate your products and services from those of your competitors and clearly see the value in buying from you.
If you would like some advice on finding the profitable customers for your own business, or you know someone at another business who might need help, then please contact us. The sooner you start, the sooner you will benefit.
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