The success of your business depends on your customers, so you need to know as much about them as possible.  Your accounting software and Excel documents may help you track some of your customer activity.  But Profitably can help you identify trends at a higher level and then drill deeper into each customer’s P&L to give you the information you need in a format you can use to help inform your decisions.

Customer Profitability Chart

Which customers are making you money and which customers are losing you money? This chart lays out your customers by profitability (on the y-axis) and sales volume (on the x-axis), creating four buckets of customers: Stars, Sprouts, Noise, and Dogs.

First, you should be thinking about trends within each group. Do all your star customers buy the same products from you? Are all your dog customers from the same demographic? Spotting patterns will go a long way towards figuring out what your business has been doing right and what your business has been doing wrong.

Star customers (profitable, high volume) — These are your best customers, and are likely driving the bulk of your profits. You would clearly like as many of these as possible, so spotting similarities between them and replicating them should be a priority. Are there any potential customers that are similar to these that you’re not selling to? Opportunities may lie in adjacent markets that you’re not directly involved in. As you seek out more stars, you should be careful not to forget about your existing ones. It’s easy to be complacent with these customers; they’re such good customers that it’s hard to imagine them leaving. But those are famous last words. You should make sure these customers continue to be happy, and keep abreast of potential competitors looking to steal your stars.

Sprout customers (profitable, low volume)  – These are customers that you like, but that you probably don’t see as often as you’d like. Perhaps they are new customers that you’ve just started doing business with. In any case there is potential for these customers to be your next stars, and thus you need to find ways to grow your business with them. To do so, it’s best to get to know them better. Are they doing the bulk of their business elsewhere, and only working with you occasionally? Are these customers small, but growing? If so, you should be trying to anticipate their future needs so that your sales with them grows as their business grows. Finding cash to invest in these customers can really drive future growth and profitability in your business.

Noise customers (unprofitable, low volume) — These are your “bad” customers. Usually, these customers take away from your time and your bottom line. As a result, you need to think very hard about why you continue to serve them. Are they newcomers that you are confident you can convert into profitable customers? Are there one-time, extraordinary circumstances that are driving losses? Whatever the reason is, you should have a very clear plan for what to do with them. Having noise customers in the short term is ok, but you need to have a long term plan for how to either improve them, or ultimately walk away.

Dog customers (unprofitable, high volume) — These customers are tough. You do a lot of business with them so you may not have realized they were costing you money. You may have even thought that some were star customers. But now that you know otherwise, the question is how did these customers become unprofitable? Were they star customers at first that became unprofitable? Were they noise customers that grew but never became profitable? Perhaps the nature of your business has changed, thus shifting who your good and bad customers are. Figuring out what has changed and how they became unprofitable will help inform what you should do next.

Our proprietary technology redraws your traditional P&L in a way that supports decision-making.  We call it a “smart” P&L and we’ve transformed your old-style Profit & Loss Statement into a power tool for managing your business.

View Customer Acquisition Cost

You know that you need customers to have a successful business.  But do you know how much it costs to acquire each of those customers?  Do you how each of those customers will benefit you over their lifetime?  The answer to these questions help illustrate the balancing act between Customer Acquisition Cost (CAC) and Lifetime Value of a Customer.

Essentially, in order to be profitable (and stay profitable), your LTV must exceed your CAC.  But calculating your CAC can be a tedious and time-consuming activity.  Profitably’s smart P&L does this for you instantly for every single customer you have.