Setting the Stage: 

If you read the first article in this series, you now know the importance of understanding your profit margin on a customer-by-customer basis to grow and stay competitive, especially for companies with a diverse customer base. A diverse customer base could mean small to large accounts within a vertical industry. In my case, we sold software to automotive dealerships that ranged from single-point used cars stores like Fairly Reliable Bob’s to large national groups. Diverse could also mean selling a more generic product across many industries. 

Within that diverse customer base, there is usually a segment of customers that represents your Ideal Customer Profile (ICP). These are your “most profitable” customers and the ones you want more of. Once you go through this exercise, you might be surprised to find that your ICP is much different than you expected. You may even discover that certain product mix combinations create a better ICP. 

It’s not always just about who pays you the most or has the largest account, because the cost to service each customer plays a critical role, especially in a time where AI utilization cost by customer can vary dramatically. The process of customer mapping reveals your ICP and allows you to strategically focus marketing, sales, and customer retention teams on the right customers. 

Key Idea: 

Embarking on the journey of customer profit mapping begins with a thorough analysis of revenue streams and associated costs for each customer. In a future article, I’ll dive deeper into how to perform these calculations, but for now the goal is simply to understand what a profit map is and how to use it to improve your business. 

Profit mapping is the practice of categorizing your customers based on revenue and profit. I like the following categories, though you could also create groups based on revenue-weighted profit percentage (Low, Needs Improvement, Acceptable, Above Average, and High). For now, let’s focus on these:   

1. High Revenue and High Profit
2. High Revenue and Low Profit
3. Low Revenue and High Profit
4. Low Revenue and Low Profit

High Revenue and High Profit – These are your “best” customers, and you should do everything possible to protect them. This category of customers is often a strong indicator of your ICP. Further segmentation by industry, type, size, region, or account rep can help narrow your ICP and create sharper focus for sales and marketing teams.  

At my last company, each executive team member was assigned a handful of these customers, and we developed personal relationships with each of them. Our personal attention and relationships drove high retention and continued product growth. When things did go wrong or when a renewal came up, we knew we had margin to work with if needed to ensure we kept the business. 

High Revenue and Low Profit – These customers often get grouped with your best customers because of their revenue size, but in reality, they are considered your “demanding” customers. They are consuming valuable resources across the organization. In our case, they were the heaviest users of customer support. They constantly needed retraining and frequently requested product enhancements or expensive integrations. 

There are several strategies for managing these customers. First, take a look at their direct costs and determine where the expenses are coming from. If costs stem from support or development, consider offering a different support package or charging for enhancements. If the customer is paying well below retail or the cohort average, a market price adjustment at renewal may be appropriate. Finally, examine their product mix to see if low-margin products are dragging down the customer’s overall profitability. During renewals, adjusting product mix or pricing can help move these customers into the High Revenue and High Profit category.  

Low Revenue and High Profit – These are your “commodity” customers. They are valuable customers and you should continue selling into this segment provided your customer acquisition cost is low. This customer base is an ideal target for cross-selling and upselling new products. Implementing a product-led growth (PLG) or focused account management strategy can help migrate them into the High Revenue and High Profit category. Target them with high-margin product offerings where possible, and pay commissions based on margin improvement. 

Low Revenue and Low Profit – These are your “worst” customers, as they are dragging down the overall profitability of the business. Your strategy here is to either quickly move them up a tier or remove them from of the business. 

I’ll give you an example from my last company. We acquired a business that had 2,000 customers. At a high-level the business had okay profit margins, but after we completed our profit mapping exercise, we identified almost 300 low-revenue, low-profit customers–many of whom had net negative margins. Strategically, we didn’t want to lose the revenue, but these customers were costing us money. To address the problem, we implemented targeted price increases for each segment, knowing some customers would cancel while others would pay the higher price. We communicated through calls, letters, and emails to explain the situation. Many customers understood and agreed to the higher prices, while some chose to cancel–as expected. The net result was the same amount of revenue, but with fewer customers, creating a higher overall gross margin profile for that business line.    

Action To Take:

The key takeaway action today is to educate your team about profit mapping and get their buy-in on the value of viewing your customer base through this lens. Next week, we’ll dive deeper into practical account management strategies for moving customers up a tier or out of the business. Click here to sign up to receive these articles via email. 

This article is brought to you by Brad Perry, CEO of Cogs’z the industry leading platform for Profitability Management. To learn more go to Cogsz.com or Click here to request more information.