Get ready to sharpen your stakes and prepare for battle, because we're about to take on a monstrous threat lurking in the shadows of your business: unprofitable clients.
Yes, you heard that right. These sneaky profit-drainers may be masquerading as loyal clients, but they're quietly turning your profitability into a ghost town.
But fear not! We're here to guide you through the battlefield, equipping you with the tools to improve your customer financials and give those unprofitable clients a run for their money.
Is a group of customers sucking your profits dry?
Every business owner has had that sinking feeling that an individual customer, or customer group is eating into their annual profits.
Some common clues that unprofitable customers leave behind:
⚠️ A major Pain in the A$$, or PITA client, sends a million requests
⚠️ They're always pulling you into low-level meetings
⚠️ Your team wants to throw stuff the minute their email hits the inbox
⚠️ You feel your cortisol rising anytime the particular customer is mentioned
⚠️ You measure time and capacity and know exactly how unprofitable they are
🧑💻 Your CPA made you look. And it's bad
Last one didn't happen, but it's all of the above? Then you need to yeet that customer relationship.
Why? Because the health of your business doesn't boil down to the success of selling. It all comes down to individual client profitability.
Why do you need to calculate customer profitability?
Figuring out client profitability is all about understanding where your money is coming from, where it's going, and how you can use the information to ensure that your business strategy is profitable long-term. Taking the first step isn't always easy, but it's definitely worth it.
Because those unprofitable clients? Not worth much revenue, and certainly not worth all the headaches they entail. And here are just some of those headaches:
- Client Pampering: Are you donating hours like a benevolent (haha!) billionaire to certain clients?
- Sales Focus: Has your time for sales become as rare as a purple unicorn?
- Profitability: Is your overall profitability feeling under the weather?
- Overworked Team: Is your team more stressed than a long-tailed cat in a room full of rocking chairs?
- Team Churn: Are team members changing faster than fast fashion trends?
- Investment: Can’t cough up funds for new talent, marketing costs, or shiny new initiatives?
- PITA Clients: Are high-maintenance clients soaking up all the attention like fame-hungry Instagram influencers?
- Account Management: Are your account managers more scattered than breadcrumbs in a chicken coop?
Unfortunately, some of your clients are actually costing you more money than they're generating for your business. But here are ways to identify and manage customers' net revenues so that you drop the bad clients, and focus your time and energy on the money-maker loyal customer instead.
The benefits of a customer profitability analysis
If you know which clients are profitable and which aren't, then you can use this information to make sure your business is running as efficiently as possible. You can focus on creating better relationships with profitable clients, while figuring out ways to reduce the costs associated with the bipedal money-sinks.
One way to better manage client profits is to improve your client engagement. Not sure how? Then check out this article on the ultimate hack for improving client engagement.
8 Red flags that your client profitability is down
If you've ever felt the disconcerting itch that your client ROI is lower than the chances of finding a parking spot in downtown Manhattan during rush hour then, my friend, you're in the right place.
Get comfy, because we're about to dive into the 8 red flags indicating your client revenue has taken a hike to a graveyard and how these signs can wreak havoc if left unchecked. We'll also touch on the importance of early detection and share a rollercoaster of a case study to show how you can give your profits the pep talk they need.
Ignoring these red flags is like playing fetch with a grizzly bear – dangerous and unpredictable. Lengthy payment cycles, high customer churn rates, or fewer sales can go from being just annoying blips on your radar to full-blown profitability monsters.
Clients: Not All Sunshine and Rainbows
Some clients can be dreamy, but others . . . well, they can suck the life out of your profitability faster than you can say Dracula. The latter type requires a Buffy-esque solution to keep your profits safe.
Case Study: The Geeky Profit Phoenix
Need proof? Cast your eyes on Geek Powered Studios, a business that rose from the ashes of profit loss to soar into the sky of profit shares.
Through a little strategic introspection, they managed to halve their team while keeping their client base steady, proving that facing these red flags head-on can work wonders for a brand's bottom line.
Account Management: The Good, the Bad, and the Profit-Eating
Ever wondered why client profitability can tank even when most of your clients are on retainers? Meet our friend John, a man with a client list as impressive as his profitability issues were baffling.
The root of all evil here? A wayward account manager, generously handing out out-of-scope services to keep clients content.
John’s Journey: Plot Twist in the Profitability Saga
John wasn't about to sit back and let his profits evaporate. He tackled the issue head-on by setting up service tiers, deploying a tier-based client management system, and rearranging his account management team.
In true superhero style, John managed to boost his average client profitability by a whopping 23%.
Unraveling Profit Mysteries and Sharing Wisdom
During our deep dive into John's case, we unearthed many factors that were playing hide-and-seek with profitability. From vague retainer scopes to inconsistent account management practices, several elements needed a profitability makeover.
Pro tip: Don't forget to account for management and owner time in your retainers!
Level Up Your Profitability Game
Once you've rounded up these pesky red flags like our friend John, increased your average client profitability, and given your team a well-deserved pat on the back, it's time to aim higher.
By upping your average billable hour and reassessing your client base, you could double your business revenue with the same team.
Now that's what we call a profitable plot twist!
Top Tips for the Most Profit
When it comes to increasing profitability from your clients, there is no one-size-fits-all solution. Different strategies will work better depending on the type and size of business you’re dealing with. But, some methods can be applied across all types of businesses.
Tiered pricing, segmentation for a smaller group of customers
First, segmenting clients into tiers can be a great way to maximize profits. This involves categorizing different types of customers into groups that can be prioritized for different levels of service and pricing.
With this strategy, you can focus your finite resources on the most profitable customers, while still providing excellent customer service to others.
Client Management Systems (CMS) and touchpoints
Effective client management systems are key to lowering total expenses while increasing net profit.
A CMS can help you maintain better relationships with clients and manage client touchpoints more effectively. Also, a CMS can maximize profitability by helping you to keep track of customer accounts, contracts, and other important information.
Employee training for increased customer loyalty
Investing in training is important if you want to be successful. Filling any skills gaps within your team by providing training, or even outsourcing certain tasks, will ensure that you’re delivering the best possible service and increasing profitability.
Fire the money-pit customer segment
Our last and likely most effective tip? Fire the bad clients.
The ones who cost more in effort, time, and bandwidth. The late payers. The cheapskates. Get rid of them! You need those like you need a stubborn case of head lice.
Sure, it's a hard decision. But making tough yet necessary business decisions like this will serve you well in the long run.
Client Profitability Recap: Take the Next Step
Ensuring client profitability in business, whether you're running a SaaS brand or something else, is multi-step, multifaceted type of analysis. You have to consider, optimize, and analyze your:
- Customer acquisition costs
- Project management
- Time allocation
- Client onboarding process
- Project scopes
And ultimately, the overall profitability of a particular client when making decisions about firing or retaining customers.
Use the following formula to ensure client profitability:
✅ Cost of acquisition and closing rates are crucial metrics for evaluating sales efficiency and profitability.
✅ Project management is key for client profitability. If you don’t project scope correctly, you lose money.
✅ Onboarding impacts your bottom line and customer retention. Don't screw it up!
✅ Retention is a huge opportunity for great cashflow. Review profitability client-by-client, and consider revenue and time allocation.
✅ Emotional reasons may influence the decision to keep an unprofitable client. So, re-onboard the client to improve their profitability.
Understand where your money is coming and going, and recognize the early warning signs that something may be off with your client profitability.