Which client is the best?
Which client is the most profitable, and which one costs us money? These are questions that should be asked by marketing agencies, software houses, service companies, SaaS firms, law firms, accounting offices, and other service companies operating on a subscription model.
The key is client profitability, meaning the answer to the question: am I making money on this client? How do we calculate it?
How to calculate client profitability in a subscription model?
Example: a software house developed a program for e-commerce management. This software is sold in a SaaS subscription model, renewed monthly or quarterly. For simplicity, let’s assume it is used by five clients, generating a total of 65,000 PLN in monthly revenue:
Monthly Revenue | % of Total Revenue | ||
Client 1 | 24,000 | 37% |
|
Client 2 | 16,000 | 25% |
|
Client 3 | 12,000 | 18% |
|
Client 4 | 7,000 | 11% |
|
Client 5 | 6,000 | 9% |
|
Total | 65,000 |
At first glance, Clients 1 and 2 generate over 60% of the company’s business, making them the most important. However, to assess client profitability, we need to consider the cost of servicing each client. What constitutes the cost of client servicing? In this case, the company maintains a team of consultants and developers who handle orders from individual clients. There may also be additional costs such as IT licenses or subcontractor fees.
We need to determine the number of hours the company’s employees spend servicing each client and multiply those hours by the hourly rate of the employees. After subtracting these costs from the revenue per client, we get the actual profitability of the clients:
Monthly Revenue | % of Total Revenue | Hours Spent on Service [h/m] | Service Cost | Profit on Client | Profitability % | ||
Client 1 | 24,000 | 37% |
| 98 | 17,640 | 6,360 | 27% |
Client 2 | 16,000 | 25% |
| 44 | 7,920 | 8,080 | 51% |
Client 3 | 12,000 | 18% |
| 12 | 2,160 | 9,840 | 82% |
Client 4 | 7,000 | 11% |
| 2 | 360 | 6,640 | 95% |
Client 5 | 6,000 | 9% |
| 1 | 180 | 5,820 | 97% |
Total | 65,000 |
The client generating nearly 40% of the revenue turns out to be the least profitable client for the company. Why? Because the cost of servicing this client, calculated by the salaries of the employees assigned to their orders, is so high that it consumes a large portion of the revenue. As a result, from 24,000 PLN in monthly revenue, the company is left with 6,360 PLN of gross margin (first-level margin), which translates to a profitability of 27%.
How to improve client profitability?
The lowest profitability does not mean we should stop servicing this client. What can we do to improve profitability? Our clients have chosen to:
1. Negotiate rates. If we are sure that the client will stay with us, the quickest way to increase profitability is by raising the subscription fee.
2. Verify service costs. Why are our consultants and developers spending so much time on the least profitable client? Are they correctly allocating worked hours to clients? There might be inefficiencies in the team’s work that can be improved, and the saved time can be allocated to new clients. This will improve client profitability and increase the overall profitability of the company.
3. Stop servicing unprofitable clients. In extreme cases, the cost of servicing a client may be higher than the revenue. Sometimes the best solution is to end the cooperation with such a client.
4. Change the internal client service model. We’ve encountered cases where the highest revenue-generating clients were prioritized without considering profitability. This can lead to losing the most profitable clients if they are not satisfied with the service quality.
5. Restructure the client portfolio. Regular profitability analysis will help identify which clients are the best for us and how to keep them in the company, as well as acquire similar clients from the market.
It is also important to monitor the trend, i.e., how client profitability changes over time. It is worth doing this regularly, e.g., quarterly or monthly. This way, we can react promptly and maintain an optimal client portfolio.
The Results
- 30+ processes delivered
- Over 30,000 hrs delivered back to the business
- 100% SOX compliance in Settlement process automation
- >95% success rate of bot case completion
- SDK delivered for native platforms, enabling Virtual & Live agent communications across multiple mobile platforms
