What is profitability by client?
Profitability by client is a measure of how profitable each client is for a business. It is calculated by taking the net revenue from a client and subtracting any associated costs to see if the client is profitable.
Profitability by Client refers to the measure of individual client contributions to the overall profitability of a business. In the context of Professional Service Automation (PSA), assessing profitability by client aids in strategic decision-making, resource allocation, and client management strategies.
Why is profitability by client important?
Understanding the profitability of each client is important for businesses for a few key reasons:
1. It allows businesses to see which clients are most and least profitable. This helps businesses focus their efforts on keeping profitable clients happy while potentially reducing support for unprofitable ones.
2. Tracking profitability over time for each client shows if certain clients are becoming more or less profitable. This could help identify issues that need to be addressed.
3. Profitability data helps set pricing and determine if prices need to be increased or decreased for certain clients.
4. It is important for making data-driven decisions around client acquisition and retention. Resources can be better allocated to clients providing higher profits.
Why is profitability by client important?
How to calculate profitability by client?
The basic formula to calculate profitability by client is:
Profitability = Revenue from Client – Costs Associated with Client
Let’s look at an example:
Client A generated $100,000 in revenue over the past year.
Costs directly associated with Client A were $50,000 for things like project resources, materials, travel, etc.
Profitability for Client A = $100,000 – $50,000 = $50,000
Difference between profitability per client vs other metrics
While related, profitability per client differs from metrics like overall profit margins or return on investment. Profitability per client shows what revenue and costs are specifically associated with each individual client relationship. This provides a clearer picture of how worthwhile investing resources in keeping or pursuing certain clients.
1. Customer Lifetime Value (CLV): While CLV calculates the total value a client brings over the relationship, profitability by client focuses on immediate contributions.
2. Customer Retention Rate: Retention rates measure retained clients, while profitability by client measures the financial impact of each client.
3. Customer Satisfaction Scores: Satisfaction scores gauge client happiness, whereas profitability by client emphasizes financial contributions.
|Importance / Use
|Profitability by Client
|Profit generated from individual clients or customer segments
|Indicates the profitability derived from specific clients or customer groups
|Customer Lifetime Value (CLV)
|Total value a customer brings over the entire relationship
|Helps assess the worth of retaining a customer and informs marketing
|Customer Acquisition Cost (CAC)
|Cost incurred to acquire a new customer
|Measures the cost efficiency of acquiring new customers
|Customer Churn Rate
|Percentage of customers lost within a specific period
|Reflects the rate of customer attrition or loss
How profitability by client is used?
Businesses utilize profitability by client analysis to make informed decisions regarding resource allocation, pricing strategies, and customer retention efforts. By identifying and nurturing high-profit clients, companies can tailor their services, adjust pricing models, and allocate resources effectively to maximize returns. Understanding client profitability allows businesses to make strategic decisions like:
1. Setting client-specific pricing and contract terms
2. Determining which unprofitable clients to focus less on or potentially lose
3. Identifying overperforming clients to pursue deeper relationships with
4. Informing sales and marketing efforts on client acquisition and retention
5. Optimizing resource allocation to support most profitable clients.
Ready to Optimize Your Profitability?
KEBS professional services automation (PSA) software gives businesses powerful tools to track profitability by client. Features like project management, expenses tracking, and reporting allow associating costs accurately to each client engagement.
Segmented reporting then provides insights into which clients and services are most and least lucrative. Contact KEBS today for a demo to see how the solution could help maximize your profitability.