What is a Profitable Customer?
A profitable customer is any client for whom the resources utilized to acquire and maintain his or her business is exceeded by the profits earned from having that business. In order to determine if a client is truly profitable, many different factors must be taken into consideration, including the cost of sales efforts, commissions paid on the revenue generated by the customer, and the wages, time, and equipment expended in maintaining customer service and support. It is possible for a profitable customer to become unprofitable over time, especially in situations where the volume of business is reduced and the client demands more attention.
Many salespeople will consider the potential profitability of a customer prior to initiating that first contact. This involves qualifying the contact up front, as a means of developing an idea of what the customer needs, the level of revenue that can be generated, and the potential for the customer to require more than an average amount of care and service once the sale is completed. Should the anticipated return on the time and resources invested indicate that the supplier will make little to no profit over the life of the relationship, there is a good chance the salesperson will choose to not initiate contact, and focus on other opportunities.
Even a new client who does become a profitable customer may eventually become a financial liability. Most often, this occurs when the customer fails to pay outstanding invoices, or makes demands that lead to additional costs in providing goods or services to that client. When a once-profitable customer is no longer generating at least some sort of return, the provider must weigh the consequences of severing the relationship versus maintaining it, and decide which approach is in the long-term interest of the company.
Much of the back end expense of maintaining a profitable customer is connected with providing quality customer service. The provider must know how to handle customer complaints, relate to customer perceptions regarding a particular issue, operate customer call centers that allow the client to obtain information or voice concerns at any time, and in general keep that client happy and promote customer loyalty. Since the best customer service efforts can cost a great deal, it is important to make sure returns from the customers who make use of those resources is sufficient to make the effort worthwhile.
While it is relatively easy to determine the amount of monetary return that a customer generates, it is sometimes more complicated to measure the indirect benefits that are obtained from the relationship. For example, while the client may not generate a great deal of revenue from their orders, he or she does proactively promote the provider and the product line to other types of customers that use similar products. As a result of that promotion, those businesses eventually become clients and generate additional revenue. Should the relationship be severed, the provider loses valuable word of mouth that may slow the growth of sales significantly.
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