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Building A Good Relationship With Customers

Client Profitability Worksheet Template – Excel

client-profitability-worksheet-template-excel

Understanding how much your business makes from individual clients is a key element of business planning.

It helps to price your service correctly, forecast future cash flow and build good customer relationships with valuable clients in particular.

However, many businesses don’t conduct client profitability reports, or even know where to start.

TL; DR

Analysing client profitability is a great way to learn what’s behind your profit and improve your profit margins. The most important step is what comes after the analysis. Use the data to make informed changes that actually move the needle in terms of business performance.

How is client/customer profitability defined?

Client or customer profitability is the profit a business makes from serving a particular client over a period of time.
Many businesses have different rates or margins for different services. Often, that means some customers are worth more than others.

Profitability analysis helps to identify valuable clients and focus on developing customer relationships with the ones that are worth the most to the business. It forms a key part of growth strategies by enabling businesses to maximise their earnings per customer.

Why measuring customer profitability is important

Customer profitability reporting essentially allows businesses to identify the value different customers represent to them.

This helps to prevent getting into customer relationships that are unprofitable. It allows businesses to recognise when rates are too low, and to develop relationships that are good for business.

Read more: The importance of customer relationship management for revenue

Profitability analysis also allows businesses to segment customer bases. It’s ok to have customers that are less profitable, but the way you communicate with these customers is different from the most valuable ones.

You can nurture less valuable clients to become more profitable, or you can cut them altogether. Either way, it starts with being able to identify them.

Clients may be less profitable due to the relationship you have with them. By recognising their worth, you may also identify signs of a poor customer relationship. In these instances, you can improve the profitability of the customer by focusing on nurturing the relationship more.

Cash flow planning is also helped by profitability reporting because it allows you to predict future income.

Steps in preparing a customer profitability report

1. Define your customer costs

The first step in assessing customer profitability is measuring how much customers cost you. Yes, customers earn revenue for your business, but things like marketing, social media, customer service and shipping are all business expenses that relate to acquiring and trading with customers.

Look at all the places customers interact with your business and pull out the cost of those activities.

2. Define your customer groups

While completing a client profitability report helps to segment customers, you can also do it from the beginning based on the different types of customers you have.

Look at the reasons customers buy from you, the amount of business they generate and their size. You’ll see patterns, similarities and differences that enable you to group customers together.

Read more: How to build good relationships with offshore clients

Another way of segmenting customers is doing RFM analysis. RFM analysis looks at recency, frequency and money:

  • How recently customers made a purchase
  • How frequently they buy from you
  • How much they spend

3. Find the data

There’s a range of metrics that you can uncover that relate to customer interactions, both in terms of expenses and revenue. Depending on how closely your business monitors its customer data, it may be hard to gather all the information you need, or it may be easy.

In particular, look at your marketing spend and costs per transaction. Then you can break it down for each customer group into metrics including:

  • Marketing cost to generate an order
  • Average amount of customer service contact per order
  • Average cost of customer service contact
  • Average return rate
  • Average shipping cost

Putting it all together: a customer profitability analysis example

When you run the numbers, you’ll come up with not only a total profitability figure for each customer segment, but a complete list of metrics that feed into the final number.

For example:

Customer segment 1Customer segment 2
Average spend per transaction$200$300
Marketing costs$30$50
Shipping costs$10$15
Customer service costs$15$35
Total costs$55$100
Total profit per transaction$145$200

In this example, you can see that while the costs associated with the second customer segment are higher, because these customers tend to spend more, it generates more profit.

Using customer profitability analysis

One of the real challenges of completing a client profitability report is figuring out how to use the data. In particular, with so much data in front of you, it can be difficult finding a place to start.

Ultimately, it depends on what opportunities there are to make improvements. There are three main ways to analyse your client profitability model:

  1. Focus on the top

Look at the customers you sell the most to and look for ways to increase the business you do with them. This could mean selling more and making more revenue, or increasing the profitability involved in your most frequent clients.

The more business you do with a client, the more likely they are to trust you. This may mean they’ll be more receptive to changes that benefit them more, and create more business for you.

2. Focus on the bottom

Look at the customers who are least profitable and find ways to make them more so. As with the previous point, you can do this in terms of revenue (i.e. sell more to customers you sell the least to) or in terms of profitability (cutting costs for your least profitable customers).

You may find that one of your most frequent customers is actually not that profitable. In these instances, any improvements you make will have a big difference on your bottom line.

Read more: Tips to strengthen customer relationships

A good way of doing this is to look at your most profitable customers and figure out what makes them so. They may order certain products, or have similar characteristics that enable you to target a specific market.

The lessons you learn about them can be applied to other customers who aren’t as profitable. This is perhaps why this approach is the most commonly used.

3. Focus on anomalies

Look for anything that stands out as unusual and ask yourself why. For example, a client might be using a lot of customer service time for the level of profit they generate.

A good way to do this is to order the data based on how much profit you make from each client. As you look down the list, other metrics should be in a similar order – more or less. Look for numbers that stand out as being a lot higher or lower than others, and figure out why.

Final thoughts

Running customer profitability analysis is a great way to get under the hood of your business to understand what’s actually going on with your customers.

Read more: The complete guide to customer relationship advice

When you do it, you can start to ask why high spending customers are as profitable as they are, and use that information to both attract more valuable customers and help to nurture other, less valuable customers to become more profitable.

It’s all about increasing the profitability of your business without actually changing your business. The more you know about what drives your customers to spend more, the more you can capitalise on the opportunities that exist.

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