Running a client profitability analysis, at least every quarter, will highlight which of your client contracts are making the profit they should be.
And which are not!
Many businesses will focus on sales as the key driver for success, but anyone can make a sale if the price is low enough. Profitable sales are more important than any sales.
It sounds weird and it’s a brave thing to do, but if some of your clients are costing you money and you can not renegotiate the deal, you might be better off without them. I bet you’ve thought of a couple already!
Client profitability analysis
1. Find the poor performers
Firstly you need to know which clients are the loss-makers. Do you have the information to make an informed decision?
Gut-feel is not good enough. Your management information systems need to tell you the answer in an objective way. Which probably means some manner of time recording if you are selling services.
But don’t forget to add in softer measurements such as the number of new business referrals you get from the client. Lower margins from a regular referrer could be a price worth paying and a way of saying thank you.
2. Take action
Once you know the loss-makers, ask yourself whether you can change the price you charge or the service you deliver in order to make them sufficiently profitable. The client profitability analysis has more than paid for itself if you can achieve this.
Having identified the loss-making clients, you need to contact them and give them the news. Nicely! Agree a notice period and perhaps try to offer them an alternative supplier in their area.
You will then have spare resources to be deployed on more profitable business.
3. Feedback into your next fee proposal
Client profitability varies over a period of time so conduct this review quarterly or half-yearly rather than culling a potentially profitable relationship because of one bad month.
Finally, take what you learn about profitability and margins and bake it in to your pitches and proposals for new work, otherwise you create a conveyor belt of low profit clients simply washing through your business!
What are you waiting for – go lose some clients today!!
Michael – @bluedotmichael
Related links:
Outsourced accounting and bookkeeping
Pea and Elle discuss Fine Margins
Clients – are they profitable and will I be paid in good time?
