How to Calculate Customer Profitability

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Calculating Customer Profitability
Calculating Customer Profitability (Image: profit image by Jaroslaw Grudzinski from Fotolia.com)

Many companies have experienced revenue growth without profits. If you're in the business of sales or making a profit from the sale of goods and services, it is important to focus on profits as well as revenue growth. One way to do this is to focus on understanding customer profitability. While there are many theories about customer profitability, such as the 80/20 rule (80 percent of your profits come from 20 percent of your clients), there are fewer established methods for calculating customer profitability.

Choose a profitability metric. This is dependent on the product or service sold. Common measures of customer profitability are market share, account share, dollars sold, satisfaction, and even retention. For example, if you want to calculate customer profitability based on sales, a good measure is customer percentage of total sales. That is what percentage of sales each customer represents or (and perhaps more importantly) what percentage of net income the customer contributes to the bottom line.

Add the total sales for the organization over a given period.

Obtain a listing of all customers sorted by dollar sales.

Add all costs (costs of goods sold and operating costs) for the year and divide by the number of customers you have. For instance, if the costs of goods sold are $500,000 and the operating costs are $100,000, then total costs are $600,000. If you have 600 customers, the average cost per customer is $600,000 / 600 or $1,000.

Divide the sales per customer by total sales for each customer's contribution to revenue growth. This is an indirect, but more accurate measure of profitability as it does not take average costs into consideration.

Subtract the average cost of each customer from each customer sales total. Divide each sales total by total sales for average customer profitability.

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