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Assess Customer Profitability

Posted by: Rod Kurtz on November 16, 2009

Keeping your current customers and securing new ones may seem difficult enough in the recession. But not every customer is a "good" customer. Some customers could be costing you money.

You need to evaluate the profitability of each customer and account. Are they all profitable? Is your company losing money on some accounts? This type of assessment is even more critical in today’s environment, when money is tight and most companies face extreme pressure to cut prices in order to maintain customer relationships.

You can create a budget for each customer project, based on needed labor and materials. Then you can forecast profitability for the duration of the contract or relationship. Analyze the hours it takes to service each customer a month and the average labor cost per hour without overtime. This calculation yields your monthly labor costs by customer. Add the average cost per unit of materials and you can determine your estimated gross profit for each client. Assign a portion of your fixed costs to each client and you arrive at an estimated net contribution by client.

Once you understand each customer’s contribution to your bottom line, you’ll know who your good customers really are.

Chris Carey
Chris Carey Advisors
New York

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