How to Measure Customer Profitability (and Why)
In the B2B world we hear a lot about revenue and growth strategies — both of which are critically important to business success. But what about profit? Wouldn’t companies benefit from knowing customer profitability in ways that could inform and direct their strategy?
Spoiler: the answer is yes.
Customer profitability is a key metric that B2B companies should be measuring to determine targeting segments, identify trends, optimize processes, and more.
In the sections that follow, we’ll walk through everything you need to know about how to do it, including: the definition of customer profitability, how to calculate it, and the business benefits you’ll experience from analyzing profitability at your company.
- Customer profitability measures the profit a company makes from a customer during a specific period of time.
- Profitability can be calculated across the entire business or by category (such as customer segment).
- Benefits of regularly measuring customer profitability include optimized costs, a better customer experience, and actionable data insights.
What is customer profitability?
Customer profitability is the profit a company makes from a customer or customer segment over a specific period of time. It provides insight into the overall value of the customers you serve, and it helps you uncover important insights like:
- Which customers segments are most (and least) profitable
- Where to prioritize marketing and sales resources
- Areas for improvement
- Long-term trends around customer buying habits
- Optimal price points for products and services
While revenue is an important growth indicator, profitability can be equally important to learning how you can drive more revenue with more focused efforts.
How to Measure Customer Profitability
Measuring customer profitability is simple: you take the total revenue generated from that customer during a predetermined time period (i.e. annually, monthly, etc.) and subtract the cost you incurred to acquire and/or serve that customer.
Customer Profitability = Total Revenue Generated by Customer - Cost to Acquire/Serve
Acquisition costs apply to new customers. Otherwise, you’re considering the cost to retain that customer (this is especially important for SaaS and other subscription-based businesses). Some examples of costs to be included in a customer profitability analysis are:
- Production and delivery of product and/or service
- Marketing and sales activities
- Customer success and engagement activities
- Salaries and operational costs
You can calculate your overall customer profitability, but a more granular (and often more insightful) approach is to calculate it by customer segment. There are different factors that impact customer buying habits, including product demand, customer demographics, seasonality, priority for your business (i.e. a signature product vs. niche service), and more.
When you perform a segmented customer profitability analysis, you can drill down into each segment and tailor your strategy to each.
Benefits to Measuring Customer Profitability
When you measure customer profitability, you can regularly find ways to optimize costs by allocating resources in the right places. For example, you can segment out your most and least profitable customer segments and treat them differently throughout the marketing and sales process.
This isn’t to say you won’t pay attention to lower-profit customer groups. It’s just to say that you can adjust your goals to suit each group and create strategies more attuned to their needs.
Optimized costs also come in the forms of better resource allocation, better targeting, and strategies that align with customer behavior.
Better customer experience
When your sales process aligns more closely with customer behavior, you can be confident their experience with your brand will be better — and this goes for both new and existing customers.
Targeting is the obvious way this will happen. When messaging and product offerings are relevant and high-value, customers are happy. But improved customer experiences can happen in a variety of other ways, too.
Consider the low-profitability customer we mentioned before. Perhaps that customer segment is for a very niche product that requires a high-touch sales process. You might decide to adjust your strategy by assigning that product to 2-3 reps who can become experts on the product and take it on as a primary responsibility.
As a result, your customer is happier because the sales reps are knowledgeable and provide great service. Your costs are lower because you’ve eliminated big ad spends in favor of highly targeted direct outreach. Your profit will likely grow for this segment.
On the other hand, you might notice that customers for another product totally ignore your attempts to interact with them. It’s a high-demand product, customers know what they want, and they start their own subscriptions quickly after engaging with your online content.
In response, you eliminate much of the time and effort you’re putting into direct engagement with this segment and focus on highly automated ad campaigns, through which customers can click through and make purchases independently.
Finally, you might decide to retarget your most profitable and active customers with hyper- personalized offerings. Since these customers already show high demand for your offerings, you can maximize ROI by ensuring offers are more frequent and high-value.
These three examples each show different approaches, but in all cases it’s about taking the information gleaned from a customer profitability analysis and applying it to implement better customer experiences (with bigger profit margins).
Measuring customer profitability also presents an opportunity to uncover and analyze data insights on a larger scale over time. Profitability trends across customer segments, product offerings, seasons, and other categories can all inform overarching strategies that contribute to long-term growth for your organization.
An intelligent revenue platform can significantly increase the ROI from these efforts — it can analyze data at a speed and scope not possible manually, generate highly visual reports, and use AI-powered analytics technology to generate sophisticated insights from your customer data.
Accelerate Growth with Xactly’s Intelligent Revenue Solutions
Analyzing profitability starts with a real-time understanding of your company’s revenue performance. The Xactly Intelligent Revenue Platform is automated, collaborative, and powered by data-informed insights to help you drive faster, more predictable business growth.
Learn more about how we can help you transform your revenue strategy.