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Value Creation Blog

Do You Know Where You Make Money?

Posted by Josh Patrick

key metrics resized 600If you don’t, you need to.  This is not a soft squishy metric, this is a hard one.  It’s not based on how much business a customer does.  It’s based on how much profit a customer produces.  It’s not about having a prestigious customer (there aren’t any), it’s about cash in your pocket.

Somewhere around 30 years ago I put an account profit and loss system in our vending company.  For the first time I was able to evaluate how much profit we made on each and every account we had.  Boy, was I surprised.  I thought I knew my business and I was sure I knew which accounts made us money and which ones didn’t.  I was wrong and wrong.

It starts with how much gross profit is produced.

In my vending company it was all product mix.  We had some accounts where we sold a lot of food.  Some of these accounts did a lot of gross sales but because most of these sales were in food, we had no or little gross profit.  Instead of these accounts being big winners like I thought, they were big losers.

What about you?  Do you know how much gross profit each and every one of your customers produce?  If not, it just might be a good place for you to start.  I know it’s a lot of work to get this information together, but knowing what your gross profit produces is the basis for how to develop a strong marketing plan.

Next, know how much hassle it is to service an account.

It’s hard to allocate costs across all of your customers.  I recommend that you have a standard cost and either add or subtract from them based on how much work they require.  For accounts that require extra work, add a percentage to your standard cost.  For accounts that require less, subtract a percentage.  This might not get you to an exact contribution to overhead, but it’ll help you get closer.

The next step is to value your accounts based on how well they fit in your standard work cycle.  If you’re doing a one off for a customer, it’s expensive.  If you’re doing something that you’ve done for lots of other customers, you’re likely to be pretty efficient at it.  The more standard work you do, the more effective you’ll be and the more money you’re likely to make.

What does the customer do for your cash?

How fast does your customer pay you?  Fast pay customers are more important than slow pays.  Unless you’re able to charge more money to slow paying customers you’ve become their bank and you’re not even getting paid for it.  You want to be in a position to create cash on new sales, not consume cash.

Now you’re ready to do something with this information.

Once you have a general idea of how much money each of your accounts provides for your company you can start looking at the ones who produce the most cash.  What do they have in common with each other?  Are the personalities of the buyers similar?  If so, you might have hit pay dirt.

You want to take information you gather about your best customers and find more just like them.  I call this cloning your best customer.  But, and this is an important but, you can’t do this until you know which customer provides the most cash.  Once you know which ones make the most cash, you can decide whether they fit into the profile of people you want to work with.  The combination of these two things helps you decide a marketing strategy that will bring more of this type of customers to your company.

To me, this sounds pretty simple.  Find out who makes money and then find out whether I like them.  Marry those two and only let my sales people call on potential customers like this.  What do you think?  Is this something you could do?

We’ve put together a special report on strategic marketing.  This report will help you figure out exactly what you need to do in your company to provide a demographic and psychographic profile of what your best customers look like.  To get this report, click on the button below.


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Topics: profitability, business coaching, strategic marketing

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