December 5, 2022

Small Business Advice

Profitability per Customer

Jerry Osteryoung | 7/9/2007

If the whole world followed you, would you be pleased with where you took it?
— Neale Donald Walsch

One of the most important things in running a great business, bar none, is insuring that you earn a sufficient level of profit for your business. Profit is good and lack of profit is bad. However, just because you have generated a profit, does not necessarily mean that you are earning enough. I have seen way too many businesses that just creep along without earning a reasonable level. I encourage most businesses to shoot for a net profit margin of 10%, knowing that, if they make anything above 7%, they are doing super.

While looking at profits in the aggregate is very important, sometimes there is just not enough detail in these pictures to help you make some hard decisions. I suggest that you look at the profitability you generate from at least your top 10 customers. I guarantee you will be surprised at the different levels of profits you are earning from different customers. Financial institutions do this type of analysis all the time to help them focus on the profitable areas in order to target and to deemphasize those areas of low or negative profitability.

The owners of one firm we assist did this type of analysis and they were very surprised at the result. Certain customers they thought they were making a lot of money on were the exact customers they were loosing money on. Just because you have a large amount of sales from a customer and you “think” that you are making money on them, does not guarantee actual levels of profit. There are so many ways for profit to vary from your projected levels due to additional labor or materials that you had not factored in to your price.

I urged the owners of one construction company to look at the profitability per customer. They were surprised to learn that the call back time they were putting in to keep the customer happy, was just wiping out any and all profits from their primary customer. In this case, they were able to negotiate a higher price (to account for the difficulty of dealing with this customer) without alienating the customer and thereby increasing profit.

Looking at the profitability from individual customers will help you to weed out any unprofitable customers, allowing you to focus your efforts on those areas of maximum profits. Now go out and start looking at the profit you generate from individual customers!

You can do this!

Jerry Osteryoung is the Jim Moran Professor of Entrepreneurship in the College of Business at Florida State University. He is also the Director of the Entrepreneurship Program at FSU and Executive Director of the Jim Moran Institute of Global Entrepreneurship. He can be reached by e-mail at jostery@comcast.net or by phone at 850-644-3372.

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