Which of your customers are actually profitable?

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Most owners have never run the numbers customer by customer. When they do, the results are almost always surprising: a few customers carry the business, and a few quietly lose money.

Ask an owner who their best customer is and they will name the biggest one. Revenue is visible. Profitability is not. The customer who buys the most is often the one who negotiated the deepest discount, demands the most service, and pays the slowest. Until you run the numbers customer by customer, you are guessing.

The exercise, step by step

Step 1: list revenue by customer for the last twelve months. Your accounting system can produce this in minutes. Step 2: assign direct costs. Cost of goods sold, direct labor hours, materials, delivery, and any costs you would not incur if that customer disappeared. Be honest here; this is where the exercise usually breaks down, and also where the insight lives. Step 3: assign service costs. Estimate support time, revisions, meetings, and administrative hassle per customer. Even rough estimates work: tag each customer high, medium, or low on service intensity and apply a cost per tier. Step 4: rank them. Sort by fully-loaded margin, highest to lowest. The shape of that list is the whole point.

What owners usually find

Three patterns show up again and again. First, the top 20 percent of customers generate most of the profit. Second, the bottom 10 to 20 percent are unprofitable once service time is counted; you are paying for the privilege of serving them. Third, the middle is fine but fragile: small price increases there drop straight to the bottom line because the work does not change.

What to do with the answer

Start with the middle, not the bottom. A 5 percent price increase on your solid middle customers is usually absorbed without a phone call, and it is pure margin. For the unprofitable tail, reprice first: quote the work at what it actually costs plus your target margin, and let the customer decide. Some will accept the new price and become good customers. Some will leave, which is also a win: you just freed capacity for profitable work. Renegotiate scope before you fire anyone; a demanding customer on a tighter scope can be a fine customer.

How often to rerun it

Once a year, or whenever something big changes: a price increase, a new service line, a major hire, or a lost anchor customer. Customer profitability drifts quietly, which is exactly why the exercise is worth repeating. What was true eighteen months ago is a rumor now.

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