Less is more, especially if you’re talking about unprofitable customers.

If you’ve been in business for a while, you’ve realized by now that some customers are more high maintenance than others. What might not be apparent is the degree to which high-cost, low-value customers are draining your resources and cutting into your profits. From frequent corrupt files and document changes to customized stock, these customers are often more trouble than they’re worth.

The best way to identify when to retain their business and when to walk away is to conduct a customer profitability analysis, which, when done correctly, can yield some eye-opening insights about your business.

A customer profitability analysis provides visibility into every touchpoint on the customer journey and uncovers specific costs related to which and how many resources each customer is using. While a customer profitability analysis can show some impressive results, it doesn’t have to consume a lot of bandwidth. With access to the right information, print service providers (PSPs) can conduct a single customer profitability analysis in as little as an hour. For PSPs that want more precise data, the customer profitability analysis might be more involved.

Reasons to Perform a Customer Profitability Analysis

Let’s say you’re working close to production capacity and you’re wondering whether you have the resources to bring more customers on board. One option for increasing your capacity would be to invest in more equipment and hire more workers, which could require a significant investment. The better option may be to make room in your portfolio by replacing unprofitable customers with profitable ones.

Performing a customer profitability analysis can also be useful to determine what customer behavior needs to change. For example, if a customer profitability analysis identifies that a customer has thin margins or is unprofitable, the reasons could be that the customer makes letter changes often (i.e., uses a lot of CSR and IT resources) or uses custom stock (i.e., uses more labor because their jobs are not combinable). In these cases, you may want to begin charging them for letter changes or convert them to a standard stock.

Getting Started — Calculating Costs

To get your customer profitability analysis started, the first step is to identify your costs, which generally fall into one of two categories — variable and fixed. From here, you can construct an analysis based on either contribution margin, fully absorbed margin or both. Contribution margin considers only the costs that it takes to service a specific customer account. Usually, these are your variable costs like stock, CSR and IT costs, direct labor, clicks, toner/ink, and sales commission. Fully absorbed margin is really an extension of your contribution margin and includes costs that can’t be allocated to specific customers. Usually, these are your fixed costs, such as rent, utilities, indirect labor, and more.

Identifying specific variable costs related to a customer for contribution margin can be achieved as follows:

· Stock – cost of stock multiplied by price per piece

· CSR and IT costs – total hours spent multiplied by labor cost per hour (includes taxes and benefits). Note, a system to track CSR and IT time by customer/job is extremely helpful to capture this correctly

· Direct labor - number of pieces per hour multiplied by direct labor cost per hour (includes taxes and benefits). Note, be careful not to impact a customer profitability analysis with your production inefficiencies

· Clicks/toner/ink - number of sheets/feet multiplied by cost per feet or average toner/ink cost per sheet. Note, for high-coverage jobs, this can be customized to capture higher costs

· Machine cost – see below for cost driver allocation

Cost Drivers

To allocate resources that cannot be attributed to one customer, a cost driver for those resources is needed. This cost driver will effectively allocate the total cost for that resource amongst the jobs/customers that are using it. For example, an inserter is used to service more than one customer. The total cost to run an inserter includes cost to own/lease, maintenance, supplies, etc. The inserter has a total average capacity of X amount of packages, which would be the cost driver. To allocate cost to a specific job/customer, the proportion of the total capacity that job/customer required compared to total capacity would be multiplied by the total cost to determine the allocable printer costs for that job/customer.

Fully Absorbed Margin

To determine fully absorbed margin, all of the other costs your company incurs need to be allocated to a customer. To determine this, you would use the cost driver process explained above. However, determining the cost driver for each type of indirect cost is not as straight forward because there is not a direct link between an activity and these costs. Therefore, cost drivers can vary from cost to cost if there is some rationale behind them. Below are some examples of cost drivers that can be used:

· Revenue

· Volume (packages, sheets, etc.)

· Number of jobs

· Number of files

For example, to allocate occupancy costs, volume may be used as the cost driver since equipment and, correspondingly, space is usually driven by the amount of packages produced.

Using What You’ve Learned to Cull Customers

As you conduct the profitability analysis, you’ll start to notice some trends. If any of these red flags sound familiar, you may be dealing with an unprofitable customer:

· You receive a high volume of change requests. If your customer is calling every other day with a new request, they’re probably taking up more time than they’re worth

· The customer offers a low volume of work

· The customer uses non-standard or customized stock

· Your work for the customer only involves print and mailing. These jobs are a red flag because the high-value data services are excluded

· The customer has time-consuming pull requests that aren’t offset by cancellation fees

In terms of frequency, it is optimal to run a profitability analysis against suspect customers at least once a year. Once you’ve identified unprofitable customers, there are choices to consider: You can change your customer’s behavior in terms of how they do business. You can also increase your pricing or implement minimums. Your final option is to terminate the relationship.

When culling customers, start by identifying those that provide high-value projects and consume minimal resources. Next, identify any customers that provide value, even if they consume significant resources. After you’ve identified customers that provide a low volume of business and consume a lot of resources, ask yourself whether they have the potential to grow business in the future. If the answer is no, then chances are good that culling the customer is in the best interest of your business.

Unprofitable customers consume a lot of resources, but unless you perform a profitability analysis, you might not realize it. Performing a customer profitability analysis — or hiring someone to do it for you — is a step every business should take to maximize the value of their customer portfolio. If you can get a handle on which customers cost more than they bring in, you will no doubt begin to see big differences in the profitability of your business.

Ed Horowitz is Vice President of Operational Consulting for Transformations, Inc., developer of Uluro, a comprehensive Customer Communications Management (CCM) software. A CPA, Horowitz’s wealth of experience and achieved industry success in operational excellence helps customers and prospects understand how to use Uluro more effectively optimize their workflow operations. Visit https://www.uluro.com/ for more information.

This article originally appeared in the January/February, 2023 issue of Mailing Systems Technology.