There are basically four ways of slicing and dicing information to assess profitability. Some ways do it much better than others.

1.    The total amount a customer spends. This is the most common one business people apply. If Customer A spends ₤250,000 per year with your business and Customer B only spends ₤150,000 per year, it’s likely you’ll see Customer A as the bigger customer.  It’s straightforward but in fact it’s by no means an accurate way of telling a ‘good’ customer from a ‘not so good’ one. You need to dig deeper for that.

2.    The gross profits earned from each customer’s purchases. Say Customer A’s ₤250,000 buys them 250 basic units at ₤1000 each and your gross profit per basic unit is ₤185, then their profit contribution to your business is ₤46,250. If Customer B’s ₤150,000 buys them 5 luxury units at ₤30,000 each and your gross profit per luxury unit is ₤8,500, then their profit contribution is ₤42,500. The mathematics is very simple and demonstrates that although Customer A spends ₤100,000 more than Customer B in a year, their contribution to your profits is only ₤3750 greater. Next, look at the number of purchases made by each customer.

3.    The number of purchases each customer makes. Customer A makes 250 purchases a year whereas Customer B makes only 5 purchases per year. Customer A provides a profit contribution of ₤185 per purchase, while Customer B provides a profit contribution of ₤8500 per purchase.  Or to look at it another way, each purchase made by Customer B is nearly 46 times more profitable than a purchase by Customer A!

4.    The cost of servicing each customer. Finally, calculate the costs of servicing them. Taking everything into account from selling costs to fixed overheads, it’s still likely that a customer making five purchases per year is going to cost less to service than one that makes 250 purchases per year.

This sort of analysis reveals some interesting facts important to your profitability and maybe your marketing approach as well. Customer B – the ‘smaller’ customer, is really worth about the same to your business as Customer A despite the ₤100,000 difference in what they spend with you. When planning a profit strategy you’d be better off getting customer B to purchase just one more unit than trying to get Customer A to make a lot of extra purchases, or to get more customers like B than A.

Take a new, more analytical look at your customers and their purchases. Look for their contribution to your net profit rather than just their turnover and you’ll start seeing them in a different light. Some probably won’t turn out to be as big – or as small, as you’d thought.