How a Customer Profitability Analysis Can Drive Profits to Increase Your Bottom Line
One of the first things we do when working with organizations in the healthcare and wellness industry is conduct a client profitability analysis using a Results Behavior Matrix. This tool helps us identify clients that are aligned with the business’ goals and values, as well as clients that present challenges. The matrix categorizes clients into four quadrants, each representing a different combination of desired results and behaviours.
This article will break down this exercise and the tangible steps you can take with it to increase your bottom line.
Table of contents:
The Results Behavior Matrix
Analyzing Customer Lifetime Value
Leveraging Each Customer Group
Transforming Your Business
The Results Behavior Matrix
Top Performers - AKA the Perfect Client: These clients fall in the top 25% by delivering both results and the desired behaviors. They are bringing in great return and your staff love to work with them.
Potential Opportunity: This 25% of clients deliver results but don't exhibit desirable behaviours, they’re a bit challenging to deal with. For example, sending late payments, showing up late, missing appointments.
High Potential: Clients in this category exhibit desirable behaviors to work with but have yet to deliver the expected financial results. This quadrant has a lot of room for improvement.
Poor Fit: The last group doesn’t exhibit the results or behaviors.
Top performers are the clients your staff enjoys working with. They align with your company and they make you money. As for poor fits, I don't believe there are bad clients, but sometimes organizations try to meet the needs of clients that they shouldn’t be catering to. Alternatively, the client may be seeking products or services organizations that don’t offer them.
The goal of this exercise is to make sure you’re capturing all the value you can from your best clients, moving your high potential clients to either improve their behavior or make them more profitable, and phasing out your poor fit clients. The Customer Profitability Analysis is critical to forming a solid profit improvement plan and ultimately increasing your bottom line.
Analyzing Customer Lifetime Value (CLV)
To start this exercise, list clients in descending order of lifetime value over the last 3 to 5 years, considering revenue. Although gross margin provides more accuracy, most people find it easier to work with revenue. This client value analysis helps you understand where your most profitable growth lies.
The insights gained from this client value analysis often surprise business owners. They discover some clients are more crucial than expected, while others don't contribute as much as anticipated.
After we get it from top to bottom based on revenue, I ask them three questions about those clients:
Do I have some of their work? Do I have most of their work? Do I have all of their work?
This is really important because you start to understand the potential within the client. You may have a client that’s giving you the results, giving you the behaviours, and you only have some of their work. That is BIG potential. You may have a client that has all the desirable behaviours in the world, but doesn’t give you very much revenue and you already have all of their work. It may be a client you really like working with, but they’re never really going to grow. This is especially important when offering a service where the client might look at multiple providers.
Leveraging Each Customer Group
Your Top Clients
Now that you can identify the top 25% of your clients, you can analyze the trends by asking: Where are they? Where do they come from? What are they so valuable? By asking these questions, you can accurately determine your Ideal Customer Profile (ICP). This analysis provides a solid foundation for prospecting and focusing your efforts.
The High Potentials
The quadrant representing clients who exhibit positive behaviors but have not yet delivered enough return is an excellent starting point for revenue growth. This is a whole crop that you can almost immediately turn around and generate a lot of revenue from by nurturing them. Simple conversations with the clients you’re already on good terms with can open doors for more work with them.
Challenging Relationships
Clients that generate significant revenue but exhibit undesirable behaviours can be challenging to manage. In the short term, businesses often need to work with them, but in the long term, you can create a plan to change the relationship. You can sit down and have a conversation with them and say, look, these are the behaviors we’re seeing and that we’re not going to deal with anymore.
The Bottom 10%
The most significant opportunity often lies with clients in the bottom quadrant, who don’t deliver results or exhibit positive behaviors. As a general rule, around 10% of these clients are taking up a lot of time and actually costing you money to serve. Once you see that, you will stop accepting that revenue and stop wasting cycles. You will find ways to exit those clients.
The best companies I’ve worked with have developed plans with us on how to actually profit from that exit. By that I mean, they realized they’ve been trying to serve a client that doesn't work for them - it’s not their core competency or they can’t really get it done. But there are other people who can. In this case, I have seen good companies make mailbox money by referring these people out.
An important thing to get right here is to make sure you are documenting that referral and never sending people to a single referral. You don’t want to take responsibility for the choice, so you need at least two plus referrals to send people to. Make agreements with two or three organizations that are much better suited that you’ll send them over to. You won’t always be able to get the referral dollars, but you’re still doing right by the client that you’ve served and doing right by your business.
Transforming Your Business
The real impact of this Customer Profitability Analysis becomes apparent when businesses imagine trading their bottom 10% for clients that resemble their top 10%. It’s unbelievable how much better your business could be. The transformation in profitability is often dramatic, leading to significant increases in your bottom line.
As a general rule of thumb with the businesses we work with, this Customer Profitability Analysis is normally one of the very first moves we make to transformation.
Conclusion
Leveraging a Customer Profitability Analysis through a Results Behavior Matrix is a transformative strategy that can elevate your business and increase your bottom line. By categorizing your clients based on their behaviors and profitability, you gain invaluable insights into which relationships to nurture and which to let go of. The process provides clarity on which clients align with your business goals and highlights opportunities for growth within your existing client base. Ultimately, this analysis empowers you to refine your focus, boost profitable growth, and build a portfolio of clients that truly align with your vision for long-term success. By embracing these insights, you'll be better equipped to make strategic decisions that drive your business toward a more profitable and sustainable future. This client analysis approach should be included in all future profit improvement plans and act as a roadmap to grow your small business.