As part of our ongoing KPIs series, we look at Measuring Client Profitability – who are your stars & who are your drains?
As your business grows and your customer base expands, you’ll find more profitable customers than others. Many factors contribute to the profitability of a client.
- Non-Billable Hours – How many non-billable hours does the client consume? Consider travel time back and forth to onsite visits, invoicing and reporting, and other activities we do not charge for. For example, Client A is willing to meet virtually, thus no travel time. On the other hand, client B insists on meeting in person – 30 minutes in each direction, gas, wear & tear, parking. It’s easy to see which is the more profitable arrangement.
- Variable Billing Rates – Clients come to us at different stages. A lower billing rate may be in place from an older relationship. Many business owners are reluctant to raise prices on “good” clients, but this can result in pricing disparities and impact the bottom line over time.
- Managing Expectations – Often, when wooing a new client, we will do more hand-holding to solidify the relationship. However, this sets a level of expectation on the client’s part. For example, the client expects to deal with the principal or a senior level of the team when a junior member is more than capable of meeting the stated objectives. In addition, since the senior member commands a higher billing rate, their constant participation impacts the project’s profitability.
- Scope of Work – SOW describes the work activities, deliverables, timelines and milestones, pricing, quality requirements, and governance terms and conditions of the working relationship. We often don’t have the full details when bidding on new work. We make the best guess as to the time and resources needed to meet the client’s objectives. Once we actively engage with the client, we do much more work than anticipated. To address this, we will often add a provision in the proposal that provides trial period pricing and a chance to revisit the pricing later.
- Scope Creep occurs when services are added to the original agreement without increasing the contract. This is because the individual requests aren’t that big, and we don’t want to “nickel and dime” clients. But over time, these additions can add up and impact the profitability of the relationship.
As busy business owners, we glance at the P&L where all our clients are lumped together. However, to understand the individual profitability, we need to create separate P&L tracking on a client level. This gives us a better sense of the actual value of a particular client.
As business owners, we need to ensure we are pretty billing our clients while, at the same time, we are adequately compensated for the work performed. In addition, we must ensure we capture the true costs of supporting the client and allocate the appropriate internal resources efficiently.
We welcome the opportunity to help you review your client profitability, set tracking mechanisms to allocate time and resources on a client level, evaluate competitive pricing, and ensure all your clients are stars!