Making Sure You’re Dedicating Your Resources to the Right Clients
By Jill J. Johnson, MBA
Few enterprises truly understand the actual profits generated by the individual sales they make. Most metrics for sales effectiveness are monitored by reviewing top line revenue results. Yet the most critical determinant of ongoing business viability is understanding what revenue actually drops to the bottom line after all costs have been taken into account. You must understand what profit is generated by sales to each of your clients. Then consider the benefits and vulnerabilities the cumulative impact these sales mean to your business. Knowing the breakdown of the profitability by the individual sales to your clients can have a significant impact on your ability to achieve your business goals.
1. Understand the Impact of the Profit Per Sale
There are many expenses that go into determining profitability for a company. The same is true for determining the profitability of a sale. Each sale has multiple components impacting its final profit. You should consider your total cost of goods sold, including investments in promotion and delivery expenses. Factoring in the costs associated with the staff time required to generate a sale is a must, as well. Unfortunately, few companies consider all these expenses when developing their marketing and sales strategies. Whether you are working on growing your business or you are struggling financially, the impact of the true profits generated by each individual sale takes on greater importance.
2. Know Your Profit Per Client
Frankly, not all clients are worth the effort to generate the sale. Sometimes your growth goals for your business mean you also are growing beyond clients you have historically served. This transition period is a very vulnerable point for any enterprise. It is also very stressful because you might be wrong and wind up losing a client that could have provided even more revenue value if you had not been afraid to maximize your relationship.
Carefully study the costs associated with serving each client. Perhaps you have long-term clients you like personally, but if you have not taken the time to explore the costs of the sale, their value to your business may have changed dramatically over the years. Before abandoning these clients, try to identify options to trim your expenses without jeopardizing your quality. But it may be time to move on if they are not generating any real profit for your company.
3. Review Your Customer Segments Revenue
Using a target marketing approach to grouping your customers into similar client segments provides you with a more detailed understanding of what is working and what is not. The key to effective target marketing is to focus your sales activities and expenditures toward those type of customers who can best be served by your enterprise, who will stay with you over the long-term and who will generate solid profitability.
4. Evaluate Individual Sales Profitability
There are two ways of looking at your sales profitability data. One is by the individual clients. The other is by combining clients using some specific target marketing components. Grouping clients by similar characteristics makes it easier to identify trends in the data that you can use to assess the profitability of each of these major segments.
There are many options for grouping your customers into segments. For a B2B client, you could group them by their industry sector, number of employees, location, etc. For a B2C customer, you could group them by where they live, personal attitudes, age, family size, income level, etc.
If Client Segment A generates solid profits for you, but all of your marketing efforts are being devoted to Client Segment B who are barely breaking even, the choice is obvious. You must retool your marketing and sales activity to attract more prospects from Client Segment A.
5. Monitor Individual Client Profitability
A complete review of the mix of your customers and sources of sales will reveal your potential vulnerabilities if market conditions change. It is not enough in today’s complex and competitive marketplace to look only at your total overall sales. If you have one customer that generates more than one-third of your sales, you are in an extremely vulnerable position if you lose that client to a merger, change of staff, or if it goes out of business. Controlling and monitoring your client profitability and cost of sales allows you to take corrective action before your business’s survival is at risk. This takes on even greater importance if you are overly dependent on key clients for your profitability.
6. The Impact of Pricing on Profitability
A close companion to client profitability is understanding the impact of various pricing strategies on the perceived value of your goods and services, and how they intertwine in attracting the customers who will buy from you. Engaging in discounted pricing strategies often attract customers who are buying from you based on price, not value. If you are in a service-oriented business, this can be a slippery slope. You may get clients who keep you busy, but who do not generate the profits you need to build a sustainable enterprise or build your net worth. It is a delicate balancing act, but one you must realistically consider given your business objectives.
7. The Impact of Strategy on Profits
You must also consider the financial consequences of your business direction and your vulnerability to setbacks. This assessment allows you to make better business decisions and to set a more realistic strategic vision for your organization. “Finding a lane” or picking your niche through target marketing must also incorporate a true understanding of the costs of reaching them, as well as their ability to add to your bottom line in a meaningful way.
Reviewing the trend information for each of your major client segments is an approach that allows for high impact by re-evaluating the effectiveness of your sales and marketing efforts. It removes your emotions and relationships with your clients to allow you to be more detached in considering their influence on meeting your business objectives. They no longer become just people you like, but a bigger grouping of customer segments who impact your future costs and business growth. If you are not attracting the kinds of clients generating the profitability to move your enterprise forward, it is time to reconsider all of your sales and marketing efforts.