Your Biggest Customer May Not Be Your Most Profitable Customer.
Revenue tells management how much was billed. It does not necessarily show how much the business earned—or how much cash was tied up while serving that customer.
Customer profitability may be affected by:
- Discounts and rebates
- Transport and special-delivery costs
- Overtime or urgent processing
- Returns, rework and credit notes
- Additional administrative support
- Extended credit terms and collection effort
A useful customer-profitability review should consider:
- Revenue
- Direct costs
- Other identifiable costs to serve
- Profit or contribution
- Collection and payment performance
This can help management make better-informed decisions about pricing, credit limits, service arrangements and which customer segments to develop.
The objective is not simply to pursue more sales. It is to understand which sales create sustainable value.