Your Biggest Customer May Not Be Your Most Profitable Customer

The business owner knew exactly who their biggest customer was.

It was the customer responsible for the largest amount of revenue every year.

So naturally, the owner considered them the best customer.

There was just one problem.

The customer also required a lot of attention.

They wanted frequent meetings.

They had special requests.

They often needed work turned around quickly.

They negotiated discounts.

And because their account was so large, the business owner was always willing to accommodate them.

Then there was another customer.

This customer generated less revenue.

They rarely needed special treatment.

They paid on time.

They didn't require much extra administrative work.

And the relationship was relatively easy to manage.

One day, the business owner looked at the numbers differently.

Instead of asking, "Who generates the most revenue?" the question became:

"Which customers are actually the most profitable?"

The answer was surprising.

The biggest customer wasn't necessarily the most profitable customer.

This is an important distinction for small business owners.

Revenue tells you how much a customer spends.

Profitability tells you how much the business actually keeps after the costs associated with serving that customer.

Those costs aren't always obvious.

They can include discounts, materials, shipping, labor, refunds, special requests, administrative time, and other resources required to serve the account.

That's why good bookkeeping is about more than recording revenue.

Accurate financial records can help business owners understand where their money is coming from and where their resources are going.

For some businesses, it may be worthwhile to look at customers by:

• Revenue

• Direct costs

• Discounts

• Time required

• Payment history

• Overall profitability

  
  

This doesn't mean every less-profitable customer should be dropped.

Sometimes a customer relationship has strategic value that isn't immediately reflected in the numbers.

But business owners should know the difference between a large customer and a profitable customer.

As a CPA, I believe financial information becomes most valuable when it helps you ask better business questions.

Instead of simply asking, "How much did we sell?"

Ask: "Which customers are helping us build a healthier business?"

Because the customer who brings in the most revenue isn't always the customer who contributes the most to your bottom line.