How can I find out who are my most profitable customers?
Most business owners can tell you who their biggest customers are within seconds. They know who places the largest orders, who has been with them the longest, and who they would hate to lose.
But there’s a big difference between your biggest customer and your most profitable customer.
The reality is that some customers who generate high sales figures might not be generating much profit.
Understanding which customers genuinely contribute the most profit to your business can transform the decisions you make, improve cash flow, increase profitability, and give you greater confidence about where to focus your time and energy as you scale.
Why understanding customer profitability matters
Growing businesses often reach a point where sales continue to increase, yet profits fail to rise at the same rate.
The business is growing, sales rise, the team is really busy, but the bank balance somehow doesn’t rise.
One of the most common reasons for this is that the business is focusing on growing sales rather than growing profitable sales.
When you understand the profitability of each customer, several things become much clearer.
• You discover which customers genuinely create value for the business and which customers consume significant resources while contributing very little profit.
• You can make better pricing decisions.
• You can focus sales efforts on attracting more of the right type of customer.
• You can improve cash flow.
• You stop making decisions based purely on revenue figures and start making decisions based on what actually improves the financial health of the business.
For business owners aiming to build a company worth several million pounds, this shift in thinking can significantly improve profitability.
What do we mean by ‘most profitable’?
When people talk about their best customers, they are often referring to the customers who spend the most money.
However, the most profitable customer can be measured in several different ways.
Highest Gross Profit Percentage
Some customers generate a higher margin than others.
For example, Customer A might spend £100,000 with you and generate a gross profit margin of 50%, creating £50,000 of gross profit.
Customer B might spend £300,000 but only generate a margin of 20%, creating £60,000 of gross profit.
Customer A delivers the better percentage margin, but Customer B delivers more total profit.
Both measurements have value.
Highest Gross Profit Amount
This focuses on the actual pounds of profit generated rather than percentages.
Many business owners find this particularly useful because it directly shows which customers contribute most towards overheads and business growth.
A customer generating £150,000 of gross profit annually will often contribute more to business growth than one generating £50,000, even if the percentage margin is slightly lower.
Highest Lifetime Value
This is a commonly overlooked measurement.
A customer who has purchased from you consistently for ten years may generate substantially more profit than a customer who places one large order and never returns.
Lifetime value looks beyond today’s transaction and considers the total value a customer brings throughout their relationship with your business.
It is also worth considering whether a customer regularly introduces new customers to you.
A customer who generates a profit of £20,000 annually but refers three new profitable customers every year will be far more valuable than the figures on a sales report would suggest.
When assessing profitability, it is important to look at the complete picture rather than relying on a single measurement.
The process for calculating customer profitability
Many business owners assume customer profitability analysis is complicated. The reality is that it is a straightforward four-step process.
The challenge is simply taking the time to identify all the costs involved.
Step 1: Calculate sales for a year for each customer
Determine the total sales generated by each customer during that period.
This provides the starting point for the analysis.
Step 2: Identify all costs directly associated with those sales
Next, identify the costs that only exist because those sales are being made. These are costs that can be directly attributed to serving that particular customer.
Examples include:
• Materials
• Subcontractor costs
• Freight and delivery
• Packaging
• Sales commissions
• Volume rebates
• Merchant fees
• Product-specific support costs
Subtracting these costs from sales gives an initial gross profit figure.
However, this is often where many businesses stop, and this is where they miss out.
Step 3: Identify other benefits or costs
This stage often reveals the biggest surprises. That’s because many customers create additional costs that never appear on traditional profit reports.
Examples include:
• Excessive customer service time
• High levels of returns
• Special packaging requirements
• Additional administration
• Dedicated stock holding
• Late delivery or late payment costs
• Quality inspections
• Site visits
• Training or compliance requirements
• Warranty claims
Equally, some customers create additional benefits.
These might include referrals, long-term contracts, predictable ordering patterns, or opportunities to sell additional products and services.
Every significant benefit and cost should be included.
Step 4: Rank your customers
Once you have calculated the true profit generated by each customer, rank them from highest to lowest.
The results are often surprising.
Many businesses discover that some of their largest customers generate very little profit.
Others discover smaller customers are delivering exceptional returns with very little effort or cost.
This information provides a powerful foundation for better decision-making.
A Real-Life Example
Audioline and B&Q
A great example of why customer profitability matters comes from Audioline.
Audioline was a £25 million turnover business that had built a strong reputation by importing its own range of telephones from China and selling directly to major UK retailers – one of which was B&Q.
B&Q was not only Audioline’s largest customer but appeared to be one of its most profitable.
Annual sales to B&Q totalled £1.1 million and the sales reports showed a healthy gross profit margin of 33%, generating £330,000 of gross profit.
Everything looked excellent until B&Q requested another increase in their volume rebate.
They were already receiving a 5% rebate but wanted it increased to 8%.
The sales team initially viewed the request as relatively minor.
After all, the reports suggested there was plenty of margin available.
But before agreeing to this, we ran the numbers by carrying out a detailed Customer Profitability Analysis.
The ‘hidden costs’ that were uncovered revealed some surprising findings for the sales team...
Hidden Cost 1: Increased Volume Rebates
The additional rebate represented an extra £30,000 annual cost.
Hidden Cost 2: Sales Returns
B&Q customers returned more than 10% of products.
Audioline paid a third-party service to collect these returned items from stores across the country. The cost ran into tens of thousands of pounds every year.
Hidden Cost 3: Warehouse Costs & Penalties
To avoid significant financial penalties, Audioline reserved approximately one-third of its warehouse capacity specifically for B&Q stock.
This created substantial warehousing costs.
Hidden Cost 4: Refurbishment Costs
Returned products were refurbished rather than being sent back to China or disposed of.
Although refurbishment cost £40,000 annually, it was still considerably cheaper than the £100,000 disposal alternative.
The Real Result
When all direct and indirect costs associated with B&Q were included, they totalled approximately £300,000.
The sales report suggested B&Q generated £330,000 of gross profit.
The Customer Profitability Analysis revealed the actual profit was just £30,000.
Suddenly, the additional rebate request looked very different – it would almost certainly mean the biggest customer becomes loss-making.
Without understanding the true profitability of the customer, Audioline would have agreed to the discount and profits would have gone down.
This is exactly why customer profitability analysis matters.
What should you do once you know the profitability of each customer?
Knowing the numbers is valuable but acting on them is where the real benefit comes.
Here are three practical strategies businesses can implement.
Strategy 1: Focus on acquiring more customers like your most profitable ones
Your most profitable customers often share common characteristics.
They buy similar products, place orders in similar ways, value your expertise, and require less support.
By identifying these characteristics, your marketing and sales teams can target more businesses that fit the same profile.
How to implement…
Review your top 10 most profitable customers and identify common traits such as industry sector, company size, location, buying behaviour, or purchasing frequency.
Build future marketing campaigns around attracting more businesses that look like these customers.
Strategy 2: Improve the profitability of loss making or lower-profit customers
Not every loss-making or low-profit customer needs to be removed. Sometimes small adjustments can significantly improve profitability.
Pricing changes, minimum order values, delivery charges, revised service levels, or improved processes can all increase profit without damaging the relationship.
If a loss-making customer can’t be turned into a profit-making customer then they need to go.
How to implement…
Review the customers at the bottom of your profitability ranking and identify the biggest cost drivers.
Create an action plan to reduce those costs or recover them through pricing and service adjustments.
Strategy 3: Strengthen relationships with high-profit customers
Many businesses spend most of their attention trying to win new customers while neglecting the customers already creating the most profit.
Protecting and growing these relationships is often the quickest route to higher profits.
How to implement…
Create a structured account management process for your most profitable customers. Schedule regular reviews, explore additional products or services they may need, and actively seek referrals and recommendations.
Key takeaways
The businesses that consistently generate strong profits understand far more than their sales figures.
They understand their numbers which means they know exactly where those profits come from.
Your largest customer is not necessarily your most profitable customer.
Customer profitability should include all direct and indirect costs associated with serving that customer.
Lifetime value and referrals can significantly increase a customer’s true worth.
Customer Profitability Analysis often reveals ways to improve profits and cash flow.
Once you know which customers generate the most profit, you can focus your time, resources and sales efforts far more effectively.
The result is a stronger business, healthier cash flow, better decision-making, and ultimately more reward for the effort you put into building the company.
Ready to find out which customers are really driving your profit?
Most business owners already have the information they need sitting inside their accounts system.
The challenge is knowing how to make sense of them.
If you’d like greater clarity on how much profit each of your customers makes for your business, get in touch by dropping us an email to [email protected] or call one of the team on 0161 410 0020. You can also click here to contact us.
Disclaimer
You must take professional advice before making any decisions based on the information that you have learnt here. While every effort has been made, to make sure it is accurate it cannot be precisely tailored to your personal circumstances. This article is for general information only and no action should be taken, or refrained from, as a result of this information. Professional advice should be taken based on specific circumstances in each individual case. Whilst we endeavor to ensure that the information contained in the article is correct, no liability will be accepted by Krystal Clear Accounting which is a trading name of Kim Marlor Associates Ltd or damages of any kind arising from the contents of this communication, or for any action, inaction or decision taken as a result of using any such information.
