Knowing Which Customers Are Actually Worth Having

The number most service businesses do not have

Revenue per client is easy. Profit per client requires knowing what delivery actually cost — hours, materials, rework, the account manager's time, the calls that never appeared on a time sheet.

Businesses that produce this number are usually surprised. The distribution is rarely even, and the clients everyone assumes are best are frequently not.

Getting to a usable figure

1. Time capture at the job or client level, however rough. Approximate and consistent beats precise and partial.
2. Direct costs attributed properly — subcontractors, materials, travel.
3. Account management and support time, which is where the hidden cost usually hides.
4. Rework, separated from original work, because it is the clearest signal of a mismatched client.
5. Overhead allocated simply — a flat percentage is fine and arguing about allocation methods is a distraction.

Do not let perfect allocation delay the exercise. A rough profitability figure per client, produced this quarter, is worth far more than a precise one produced never.

What the answer usually shows

A minority of clients producing most of the profit, a group breaking roughly even, and a tail that costs money to serve. The tail is often clients everyone likes, which is why the analysis is uncomfortable.

It also usually shows that the largest client by revenue is not the most profitable, because scale came with discount and demands.

What to do with it

• Reprice at renewal for clients whose service level exceeds what they pay for
• Change the delivery model — different service tier, different contact expectations
• Concentrate business development on the profile that looks like your profitable clients
• Decline renewal in the extreme cases, politely and with notice

Lifetime value, sensibly

For service businesses, lifetime value is average annual margin times expected tenure, plus referrals. The referral component is frequently the largest and is almost never measured.

Ask new clients how they found you and record it consistently. Within a year you will know which clients generate more clients, which changes who you value.

Do it annually

This is not a dashboard, it is an annual exercise that informs pricing and account decisions. Attempting to maintain live per-client profitability usually produces a system nobody trusts and nobody uses.

Frequently asked questions