When it comes to running a business, it’s important to focus on the customers that are the most profitable.
Not all customers are created equal, and some customers may even be dragging your business down.
Differentiate Between Revenue and Profit
Just because a customer spends a lot of money with you does not mean that they generate a lot of profit.
To get a clear understanding of who your most profitable customers are, you need to take a closer look at your profit margins.
To do this, you need to calculate your gross profit margin for each customer.
This number will tell you what percentage of revenue is left after accounting for the costs of goods sold.
For example, let’s say that you have a customer who spends $10,000 with your company every month.
To calculate your gross profit margin, you would take the total revenue ($10,000) and subtract the cost of goods or services sold ($5,000). This would leave you with a gross profit of $5,000.
To calculate the gross profit margin, you would then take that $5,000 and divide it by the total revenue of $10,000, and this would leave you with a 50% margin.
On the other hand, if a customer spends $30,000 per month with you but it costs you $25,000 to deliver their goods or services, you would be making a profit of $5,000.
Despite the higher customer spend, your profit margin would stand at 16.6%.
In this case, the customer who spends less with you is actually more profitable.
So, while customer spend is important to consider, it’s not the be-all and end-all when determining who your most valuable customers are.
However, while one customer may generate an impressive profit margin, they may not necessarily drive a high volume of sales.
In this case, you might want to consider customers who generate a high volume of sales, even if their profit margins are slightly lower.
For example, let’s say that you have two customers – Customer A spends $10,000 with you per month and has a gross profit margin of 50%, while Customer B spends $20,000 with you per month but only has a gross profit margin of 25%. Customer B is still generating twice as much profit for your business, even though their profit margin is lower.
Consider Customer Lifetime Value
When determining who your most profitable customers are, it’s also important to consider customer lifetime value (CLV).
This metric looks at the total amount of revenue that a customer will generate for your business over the course of their relationship with you.
To calculate CLV, you need to take into account a number of factors, including the average purchase value, the number of purchases per year, customer retention rate, and the profit margin.
For example, let’s say that the average customer spends $120,000 with you per year, makes two purchases per year, and has a retention rate of 50%. Additionally, let’s say that your profit margin is 50%.
To calculate the CLV, you would take the average purchase value ($120,000) and multiply it by the number of purchases per year (2). This would give you a customer value of $240,000. You would then multiply this by the customer retention rate (50%), which would give you a CLV of $120,000.
As you can see, the customer lifetime value can give you a more holistic view of how profitable a customer is likely to be in the long run.
Trimming the Fat
Sometimes, if a customer is simply not profitable, you might have to let them go.
This can be a difficult decision to make, but it’s important to remember that not every customer is going to be right for your business.
Your time, and your staff’s time, is a valuable resource.
If you’re spending too much time and effort trying to service a customer who isn’t generating enough revenue or profit, then you may well be better off without them.
By focusing on customers who really drive value for your business, you can free up time and resources to better serve your most profitable customers.
This helps you to create a leaner and more profitable business that is ultimately more enjoyable and rewarding to run.
When it comes to determining who your most profitable customers are, there is no one-size-fits-all answer.
It’s important to take a variety of factors into account, including customer spend, gross profit margin, customer lifetime value, and more.
By taking the time to analyze your data and understand how different customers contribute to your business’ bottom line, you can make more informed decisions about where to focus your efforts – and increase profits in the process.
Learn more about how CFO Coach can help:
I help CEO’s earn higher ROI from FMCG Manufacturing Opportunities through Value Maximization on Profit & Cashflow so you can have the Next level of Success, Impact & Abundance.
About CFO Coach:
Discover the proven methodology that Powers Business Growth Opportunities, Profitability and Cashflow by delivering Outstanding Business Outcomes to position CEO’s, Entrepreneurs and Business Owners for Success as we Leverage our Experience, Expertise and Relationships.
DO YOU WANT TO HAVE A BUSINESS THAT GIVES YOU THE NEXT LEVEL OF SUCCESS, IMPACT AND ABUNDANCE?
Your ability to create a business that delivers the kind of life you truly desire hinges on your ability to think Strategically to help you generate more Value Creation Opportunities.
WHAT DO YOU NEED HELP WITH?
✔️ On Demand Virtual CFO
✔️ Strategic Leadership Advisory
✔️ Finance + Business Performance
✔️ Talent + Team Performance
✔️ Business Insights + Intelligence systems
✔️ Growth Opportunities + Advisory
✔️ Profit Maximization + Cashflow Optimization
✔️ Performance Tracking (KPI’s)
✔️ Business + Financial Models
✔️ Raising Debt or Equity Capital
✔️ Corporate Restructuring
✔️ Succession Planning
✔️ Creating a Freedom Lifestyle Business
WHAT IS OUR OFFER?
Our Signature solution, CFO Xcelerate Launchpad™ has been tried and tested to help CEO’s Optimize Cash Flow, Maximize Profit and Grow their Business & Impact
We’ll help you Xcelerate™ in a way you have never thought possible.
Insight Beyond Numbers™
✅Mentorship in Personal Productivity & Proficiency
✅Strategic Thinking Coaching
✅Strategic CEO Mindset Coaching
✅Emotional Intelligence (EQ) Coaching for CEO’s
Get access to the 3 Secret Strategies to Grow & Scale Your Business e-book
Join our Free Accountability Coaching Group on Mighty Networks (DM for the Invite link)
Free Complimentary Strategy Call
Ask me: To share my free e-book on Simplicity on Emotional Intelligence.
Coming up in 2022, my New ebooks on Emotional Intelligence for CEO’s, Mastering Emotions, Leadership Guides for C Suite executives and much more
𝗥𝗘𝗔𝗗𝗬 𝗧𝗢 XCELERATE?
👉 WANT TO KNOW MORE