Beyond Revenue: How Understanding Client Profitability Can Transform Your Business

Many businesses, especially in their early stages, tend to focus heavily on revenue performance and how to drive more sales. While there is nothing wrong with this in itself, concentrating solely on revenue can be misleading and may cause you to miss key information needed to achieve profitable growth. It’s easy to get caught up in chasing sales numbers, but this approach alone can be problematic.

As your business matures, you might start to notice a worrying trend: sales may be increasing, but profits are either growing more slowly or even stagnating. An initial response might be to look at your overall cost base to see where costs are rising most rapidly, and while this can be helpful, it can also become an exercise that needs repeating year after year with diminishing returns. There is a more insightful approach to achieving sustainable growth.

Moving Beyond Revenue

A more effective and sustainable way to achieve profitable growth is to understand your client profitability. This involves focusing your energy on the things that deliver the most overall financial reward, not just the ones that generate the largest sales numbers. It might seem obvious for a manufacturing business to measure and understand the profit margins it makes on its products, but it is far less common for service-based businesses to have the same level of understanding of the profitability of their client base.

Measuring Client Profitability: A Detailed Look

To measure client profitability, you need to understand your costs per client. This includes not only the cost of materials and expenses but also the amount of time each staff member spends servicing each client. Timesheets become an important tool in helping to measure staff time. Gathering and analysing all this data can be a significant task, but the insights it provides are extremely valuable. For instance, you might discover that the client bringing in the most revenue only does so at a 5% margin, while another client may generate margins of 60% but accounts for a much smaller percentage of overall revenue.

Analysing and Categorising Your Clients

Once you have gathered your data there are several ways to analyse your clients. You can plot them on a graph to visually compare individual client performance, or you may use a matrix to categorise them and label them accordingly. The approach you choose will depend on the number of clients you have and what works best for your business.

Using Client Profitability Analysis to Make Informed Decisions

Once you have completed your analysis, you will have a much clearer picture of your client base. You will understand:

• Which clients you need to nurture and prioritize.
• Where you may need to review your pricing strategy.
• The value of new and potential clients.
• Where to focus your sales and marketing efforts.

By focusing on client profitability, you can move away from simply chasing sales numbers and instead strategically target the most profitable areas of your business. This enables you to allocate resources more effectively, refine your pricing strategy and focus your sales and marketing efforts in the areas that will deliver the best results. 

Summary:

• Focusing on revenue alone can be misleading.
• Sales growth does not always equal profit growth.
• Analysing client profitability provides more valuable insight.
• Understanding costs per client is crucial.
• Client profitability analysis can reveal surprising insights.
• Categorise clients.
• Analysing client profitability can inform several business decisions.

If you want a better handle on your numbers and a clear pathway to growth join one of our Finance for Growth workshops. Find all the info here.