I recently had a discussion with a CFO of a major entity.  During our discussion he mentioned that they were looking at the overall revenue base and found that the bulk of their revenue came from just a few customers.  Further, they had build a significant support structure to generate and manage that revenue.  Not surprising when you think of the 80/20 rule which holds time and time again.

The reality is that this is likely true for many organizations.  It is hard to turn away business, but if sales incentives or specific revenue targets have been established, it is very likely that some of the revenue generated is at less that optimal margins.  The reality is that you may losing money on some sectors of your business.  Here are a few areas I would look at to begin to understand customer profitability:

• Cost of sales is the most obvious place to start.  Take a sample of your customers sales and apply all direct costs that you can think of including material, production, direct sales costs, including commissions paid.  Note I said sample, the important thing is to begin to get directionally correct information.  You can refine it later if needed.
• Consider the impact of overhead costs that are spread spread over all customer activity and make adjustments to the profitability of remaining customers if necessary.
• Then examine indirect or partially direct costs in the equation.
• If customers are extended credit, look at the cost of capital associated with carrying the receivable as well as the cost of the credit organization.
• Once you have a general understanding of your costs, take a hard look at your pricing strategies to see it gains can be made to your margins.
• There are likely more depending on the specifics of your business, but this will give you a good start.

While there are many strategic reasons for retaining customers, you may find that it is prudent to sell or unwind your activities with certain groups of customers.