15% of Customers Generate 150% of Profits!

By Matt CrellinOn May 21, 2024May 21, 2024

In working with a long term client I recently used excerpts from a book “Islands of Profit In a Sea of Red Ink’ as the basis for discussing how to further improve profitability.

Build on some MIT research from 2010 and now the basis of a successful independent business Profit Isle, the book highlights the huge differences in profitability across customer types – as quoted below:

“Over years of experience with EPM, we have found that virtually all companies have a characteristic pattern of profit segmentation:

Profit peak customers are typically about 15% of the customers generate 150% of a company’s profits.
Profit drain customers are typically about 20% of the customers erode about 50% of these profits.
Profit desert customers typically are the remainder of the customers who produce minimal profit but consume about 50% of a company’s resources.
The same profit pattern characterizes every dimension of a company: products, suppliers, sales reps and order lines.”

This leads to three obvious focus areas, again quoting from the book:

“Grow your profit peaks. This is your highest priority. It gives you a direct, rapid profit boost, and importantly, ensures that your critical high-performing business segment does not erode.
Reverse your profit drains. Surprisingly, in most cases these large, money-losing customers are unprofitable not because they have under-market pricing, but rather because they have excessive operating costs. This is a result most often due to unmeasured, unmanaged costs like overly frequent ordering and excessive expediting, which are costly for both your customer and for you.
Reduce your profit desert cost to serve. A few of your profit desert customers are important development accounts that warrant extra time and cost, but most are small, marginal customers with low profit potential. The key objective is to reduce your cost to serve through measures like portals, standardized menus and strict management of “extras.”