When was the last time you analysed your client list? Maybe it’s time to see which clients generate profit and which ones just weigh down your business so you can do something about it.
Client profitability analysis doesn’t take much time, one hour at most. There are two goals:
- identify clients that waste a lot of your time but don’t bring enough profit
- identify clients who could bring you more profit if you only had the time to focus on them
Once you identify your “bad” clients, you no longer have to try so hard to please them. Instead, you can spend that time better, like chasing new ones.
From my experience (15+ years in all sorts of marketing teams), during this analysis you shouldn’t focus exclusively on quantitative KPIs like profit margin. You have to factor in the qualitative KPIs too, which are equally important.
For example, a client pays good (good quantitative KPI) but is so difficult to work (bad qualitative KPI) with that you have trouble keeping your employees, which in turn means you lose money on recruitment.
Also, keep in mind the long-term vs short-term goals. A startup client may not be profitable now, but once they take off, you’ll be sorry you lost them.
Profitability Analysis: Quantitative KPIs
First step toward client profitability analysis is to calculate profit profit margin and profit share per client.
To calculate the profit margin, take the sum a client paid and subtract amortized fixed costs (office, taxes, lease, etc) and variable costs (time you worked).
Client A Profit Margin = Client A Revenue - (Amortized Fixed Costs + Variable Costs)
Then, plot all the clients on a graph to see which ones aren’t worth keeping. You can use Excel or Plotly.
Be completely honest with yourself when calculating client profitability. Take into the account each hour you spent on a client - even unbillable, like the time spent in a taxi on your way to the client meeting.
You can get the total value of all your time records for each client in the Active Collab’s Time Report. Then, you can run the Invoices Report and see how much money each client brought in. (You can get the total time for each client by using this bookmarklet.)
To calculate the profit share per client, divide client profit with the sum of all the profit and multiply the result by 100%.
Client A Profit Share = (All Profit / Client A Profit) * 100%
This will help you identify your biggest liabilities so you can manage risks better. If a certain client is responsible for 60% of your earnings, you’re in serious trouble because you’ll spend so much time servicing them that you won’t have the time to find other clients and diversify risk.
When most of your billable hours depend on one client, you’re in a very precarious situation and you have to make subpar business decisions because the client holds all the bargaining chips. And clients know it. They know how much power they have over you and they use it.
And it’s just a matter of time when they’ll leave and you’ll crumble - unless you do something about it now.
There are a lot of reasons why companies keep depending on big clients like those in their portfolio, the most common one being “they’re my A-list client that gives me leverage when dealing with media”. I pretty much heard it all, but in the end, they’re all just excuses.
You have to find a workaround or otherwise you risk too much. Diversify your client list and focus on bringing new, more profitable clients instead of letting existing ones impose tighter and tighter deadlines and lowballing your rates.
Note: a small client that pays on time is always better than a big client who you need to chase for payments. Stable and healthy cash-flow is the lifeblood of every business that’s more important than anyone realizes.
Profitability Analysis: Qualitative KPIs
Focus on keeping clients that give you challenges. They are good because they give you the chance to learn and grow. They force you to sharpen your skills and push you to become better each day.They are rare and you should work on maintaining relationship with them at all costs because they help you stay relevant and current.
Slowly phase out bad client who make your life bitter. You probably know who they are; even people in your company who don’t work directly with them know who they are - that’s how bad they are.
Those are the clients who swamp you with unnecessary emails, want something for nothing, and drive everyone crazy. Those clients are the reason you lose your most valuable asset - your best employees. Get rid of those clients. Most of them are not worth the hassle and energy you pour into them.
Once you set even one of these “vampires” free, your whole company will experience a sudden boost in morale and energy. You’ll have more time and creative energy to focus on acquiring new clients who’ll fill in the revenue hole. I’ve done it several time and never regretted it.
Want to know more?
This is one of the chapters from our ebook on how to grow a business.