Are Your ‘Best’ Customers Your Most Profitable?
On this episode of ClearTalk, our CEO, Brad Dempsey, is joined by Brad Malone and Joel Harris from Navigate Management Consulting to talk about customer profitability.
Are your best customers sometimes your worst customers?
All too often, integrators think about their best customers in terms of size, or revenue, or sales.
Yet sometimes they are actually your worst customers, because of what they take out of the company, or what they deliver to the company in terms of profitability.
How do we measure customer profitability?
There are three factors to look at when determining customer profitability:
First is project profitability –
If you take a customer’s project portfolio and average out the profitability of those projects, that weighted average would be one definition of customer profitability.
Second is net customer profitability –
Most integrators have at least one big customer that is intertwined with their entire organization. Profits are eroded when you start giving away free services to these customers, such as free design, or free returns. And when you let ‘special’ customers move their projects all over the map, it disrupts all of your other customers’ projects.
“When you look at the net profitability, it’s not the same as project profitability, because you are contributing additional resources to the customer that come at a cost to your integration business,” says Harris.
Third is how well does the customer work within your company culture?
Do you have any customers that are hard on your employees to the point that they want to quit?
Across the integration industry, there is widespread discussion about the challenges of finding and retaining talent. If a customer is creating attrition with your employees, causing you to have to rehire, this takes considerable profitability away from your integration business.
Being picky about your customers is a trait of mature integrators, and Solutions360 has seen more than one integrator fire customers, because they were not a good fit culturally.
“As a best practice, we see our most mature customers rank all of their customers on a quarterly basis. Starting with gross profit, seeing where they make the most revenue, but balancing this with gross margin, because you have to have that balance of margin in dollars,” says Dempsey.
If you have high revenue at low margin, that’s a risk to your business – you’re risking your labor. If anything goes wrong, you have no cushion. And you’re certainly not maximizing your labor force if you’ve got high dollar, low margin business.
Don’t get caught in a race to the bottom just to earn revenue, or chances are, you’ll stay there.
To move out of this position and make your integration business more profitable, you need a strategic plan.
Listen to the full discussion:
ClearTalk Ep 08: Measuring Customer Profitability
How do you measure customer profitability in your integration business?
Tell us in the comment section below.
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