Measuring Client Profitability: Identifying Your Stars and Drains
As part of our ongoing KPIs series, we’re examining how to measure client profitability to identify which clients are stars and which may be draining your resources.
As your business grows and your customer base expands, you’ll inevitably find that some clients are more profitable. Multiple factors contribute to client profitability:
Key Factors Affecting Client Profitability
Non-Billable Hours
Consider how many non-billable hours each client consumes through travel time, invoicing, reporting, and other uncharged services. For example, Client A, who meets virtually, requires no travel time, while Client B, who insists on in-person meetings, demands 30 minutes of travel each way, plus expenses for gas, vehicle wear and tear, and parking. The difference in profitability is clear.
Variable Billing Rates
Clients often join at different stages of your business growth. Long-standing clients may have lower legacy billing rates that haven’t been updated. While many business owners hesitate to raise prices for “good” clients, these pricing disparities can significantly impact your bottom time.
Managing Expectations
When establishing new client relationships, we often provide extra attention to solidify the partnership. However, this can establish unrealistic expectations. For instance, a client might expect to always work with the principal or senior team members when junior staff are perfectly capable of meeting objectives. Since senior staff command higher billing rates, their continued involvement reduces project profitability.
Scope of Work
The Scope of Work (SOW) defines work activities, deliverables, timelines, milestones, pricing, quality requirements, and relationship terms. When bidding on new work, we often lack complete details and must estimate time and resource requirements. Upon deeper engagement, we frequently discover that the work exceeds initial estimates. Consider including trial period pricing in proposals with opportunities to revisit pricing later to address this.
Scope Creep
This occurs when services are added to the original agreement without corresponding price increases. Individual requests may seem small, and we avoid “nickel and diming” clients, but these additions accumulate over time and erode relationship profitability.
Tracking Individual Client Profitability
As busy business owners, we often review our P&L statements in groups with all clients. However, we need separate P&L tracking at the client level to understand individual client profitability. This provides a clearer picture of each client’s actual value to your business.
Ensuring Balanced Relationships
Business owners must ensure they’re billing clients fairly while being adequately compensated for their work. This requires capturing the true costs of client support and efficiently allocating internal resources.
We welcome the opportunity to help you review your client profitability, establish tracking mechanisms for client-level time and resource allocation, evaluate competitive pricing, and ensure all your clients become stars!
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– Gary Levenberg, KID Group, San Francisco, CA