Most business owners are concerned with the profitability of their business.
To be profitable is the name of the game in any business. But to remain profitable for the long haul is forever out of reach of most business owners.
This is mainly caused by all MBA courses all over the world that taught us to manage the Profit & Loss Statement as an end to improving our profits. As long as we have a positive Net Profit at the end of the statement, we celebrate.
In our opinion, this manner of managing profits is short-lived and cannot produce any long-term profits permanently. The MBA manner of improving profits uses a few variables like – the Unit Sale Price, Unit Cost of Goods Sold (COGS), Unit Variable Costs, Total Sales Volume, Fixed Costs and Overheads etc.
All consultants and business coaches are very familiar with the above-mentioned variables and they use them to help increase the profitability of their clients’ business. While there is nothing wrong with this approach, however, the results are just too short-lived to the liking of any business owner. Every quarter the cycle repeats itself.
What is missing from the equation is the customer.
Most consultants and business coaches have forgotten that it is the customer that determine the level of profitability in any business. However, we cannot fault them as most of them do not know exactly how to determine the profitability of any customer in the first place.
We believe that all customers are not created equal. We believe there are profitable and unprofitable customers in any business. The problem is telling them apart. Therefore, the customer that buys the most from you may be costing your business more money than they make you unless and until proven otherwise.
Managing your customers is the single best way to improve your profitability permanently. Period.
To do this successfully, you need to know the Lifetime Value of each of your customer. You will need to have a data base of their purchases with your business.
1) The types of products they buy from you;
2) How often they buy from you;
3) Their average purchases;
4) The average profit margin generated per product; and
5) The average life span of each of your customer.
I know this data capture can be huge for some of you but hey do you want your business to be profitable year after year or not?
I hope your answer is a “Yes.”
It is through knowing the Lifetime Value of each of your customer that you will begin to know how to tell the profitable ones from the unprofitable ones. When this decision has been made, you will then formulate strategies to retain your profitable customers and at the same time formulate marketing strategies to capture and increase the share of your profitable customers in the marketplace.
This is by far the most permanent way to improve the profitability of any business that we have used in all our clients’ business.
While this article is intended to be brief, I believe it has all the information you need to start you thinking about dissecting your current customer base and start improving your profits.
I can be reached at firstname.lastname@example.org to answer any question you may have.