Customer Profitability

The biggest customer is treated as the most valuable. Nobody has checked what it costs to keep them.

Fix
Grow
Customers
Finance
~5 min · Calculation

The business problem

Large customers often demand discounts, extended credit, customised service and priority. Each concession seems reasonable; together they can make the account unprofitable. Meanwhile, concentration shifts negotiating power to the customer.

Why it matters

Knowing profitability by customer lets you set terms, allocate service and manage concentration risk with evidence rather than fear.

What you will learn

Calculate profitability per customer including cost to serve
Identify hidden costs: discounts, credit, special handling
Measure revenue concentration
Use the analysis in negotiations

Core questions

What share of revenue comes from our top three customers?
What does each cost to serve?
Which customers are unprofitable after all costs?
What is the maximum share of revenue we should accept from one customer?

Work through the module

Case → Decision → Framework → Tool → Application → Implementation → Review

CaseWhat is happening?

Services firm, 35 people · Illustrative teaching case

One client grows to more than half of a services firm's revenue. It demands discounts, longer payment terms and custom work, and other clients are deprioritised. Calculating the account's true profitability shows it barely breaks even. Terms are renegotiated and a target is set to reduce concentration.

Full teaching case: The Big Customer

DecisionWhat does the leader need to decide?

Accept the terms to keep the account, or renegotiate and reduce dependence?

FrameworkHow should they think about the problem?

Customer profitability and concentration

Customer profit = revenue − discounts − cost of goods − cost to serve (sales time, delivery, support, credit cost). Plot customers by revenue and profitability; monitor top-customer share as a risk.

ToolWhat can they use?

Customer profitability sheetCalculation

Revenue and discounts per customer
Direct costs
Cost to serve: time, delivery, support, credit days
Profit and share of revenue

ApplicationHow does it apply to their business?

Apply it to your own business:

Calculate your top three customers' share of revenue
Estimate each one's profitability
Decide the maximum share you would accept

ImplementationWhat changes?

What should change in the business:

Set service and terms by customer value
Renegotiate unprofitable accounts
Monitor concentration quarterly

ReviewDid it work?

How to tell whether the change worked:

Has profitability of key accounts improved?
Has concentration fallen to target?
Are terms being set with profitability data?

After this module you should be able to decide

Accept the terms to keep the account, or renegotiate and reduce dependence?

And leave with: A profitability ranking of your top customers.

Sequence · Customers & Sales

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