More customers equal greater profits, right? Not quite. As most business owners can attest, some customers are simply not worth keeping. And the time and effort that staff put into nurturing unprofitable relationships could be better spent elsewhere.
To understand where the real opportunities lie, it’s essential that companies effectively track and analyze individual customer profitability. Essentially, the customer profitability equation boils down to costs generated by a specific customer subtracted from the total revenue they bring in over a period of time. If the final number is negative or especially low, and if the account has little long-term potential, then it may be time to make a change.
Balancing the needs of the business with those of the customer
The customer-first mindset is a powerful one. Providing a first-class customer experience builds loyalty and encouraging word of mouth, helping companies set themselves apart from the competition. But it’s important not to mistake a customer-first approach with a customer-only one. The needs of the business must factor into the decision-making process—and if a customer is generating a loss or draining company resources, that needs to be addressed.
The costs of maintaining an account can fluctuate dramatically for a myriad of reasons, so one poor quarter may be nothing more than a blip. But if a customer consistently and significantly impacts a company’s bottom line, it’s time to step in and figure out why—and what can be done about it.
It may be that a legacy client is paying grandfathered prices that have long since been outpaced by rising manufacturing costs. In this case, the company could take steps to see if the balance can be redressed. If not, the next step may be to end the relationship amicably, since eating the costs is rarely in a company’s best interests.
Or maybe a company is offering volume-based discounts to a client, resulting in razor-thin margins that are only growing thinner. After clients get accustomed to a certain level of discount, it can be difficult to raise prices to reflect current market costs. Sometimes, losing an account makes just more sense than letting it cut too deeply into the margins.
With clear details around which customers are profitable and which aren’t, companies can make more strategic decisions that drive their growth. What’s more, staff can dedicate more time and energy to nurturing profitable clients and pursuing new opportunities.
Measuring profitability with robust tracking tools
Before making any major decisions, companies should weigh up a customer’s short-term profitability and their lifetime value. That requires data.
Unfortunately, the kind of data needed to do this is exactly the kind of data that companies often struggle to track. Consistently misallocated invoices and low visibility can leave companies driving blind. And with some costs harder to pin down than others, like customer service, it can sometimes seem like there’s no reliable way to track customer profitability.
Luckily, that’s not the case. Companies can capture necessary customer data automatically using a robust transportation management system (TMS) and freight audit and payment (FAP) tools. This makes it easy to keep an eye on profits and loss. And with strong business intelligence (BI) solutions, companies can drill down into that data to spot valuable insights and trends.
Prioritize profitability. Contact CTSI-Global today.