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Think About It… the e-book version » Blog Archive » How many of your customers are unprofitable?

How many of your customers are unprofitable?

by Todd Youngblood

No sales rep ever wants to turn away any business from any customer. (Truth be told, neither do I!) There seems, however, to be more and more evidence that the number of unprofitable customers is a lot higher than you might think.

We all know that some customers are more profitable than others. Just about everybody can easily get their hands on a report that sorts them by gross profit margin. It’s net margin that really counts, however, so getting a grip on total cost of serving a customer is what matters.

Does a really close look at the true cost of sales and support customer by customer reveal anything surprising? I’d have to say, “No,” only because the revelation is more like shocking! Take a look at the graph that follows. It comes from a study by Dean & Company, and its message is that two-thirds of your accounts are probably costing you money. (Is that % a bit higher than you’d expect?)

The horizontal axis shows numbers of customers sorted from most to least profitable. The vertical axis shows the net profit margin. (e.g., at the very left, the net profit margin from the most profitable customer is more than 200%.)

Here’s an easy way to interpret the graph… Assume this company has 100 customers. The top 10 most profitable ones account for 85% of the total profit dollars. The next 10% contribute 40%, and the next 15% contribute 21%.
Simply put, 35% of the customers account for 146% of the profit dollars. The other 65% of the customers eat up 46% of the profit.

Does this scenario hold true for your company? What are your key sales and support processes? Who executes the activities that make up those processes and for whom? How long does it take and what does it cost? What return does each activity produce? Is there a better way to serve your costlier market segments?

Tough questions…

Without a well defined sales and support process that has been measured in detail over time, they’re impossible to answer. Maybe it is time to kick-off that Sales Process Engineering project…

Think about it…

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