Revenue Ranks the Wrong Thing

Most owners can name their biggest clients by revenue. Far fewer can name the clients who leave the most behind once the work is done.

The two lists are hardly the same.

Some clients cost more to serve: more rounds of changes, more meetings, slower approvals, slower payment and more of the owner's time.

None of that shows on the invoice, so the biggest account can look like the best one while it quietly drains the business.

This pattern is well documented.

Harvard Business School professors Robert Kaplan and V.G. Narayanan found that the most profitable 20% of customers typically generate between 150% and 300% of a company's total profit, while the least profitable 10% to 20% lose between 50% and 200% of it (Kaplan and Narayanan, Journal of Cost Management, 2001).

Where the Cost of a Client Hides

• Extra rounds of changes that the fee never priced.
• Slow approvals. The running costs do not pause while the project waits.
• Account time: calls, status updates and check-ins that no one bills.
• Late payment. The business funds the work until the money arrives, which is how a business ends up making money but short of cash.
• The owner's hours spent rescuing the relationship. (More on this in Why Your Business Cannot Run Without You.)

Worked Example:
A Marketing Agency

A marketing agency bills Client A $120,000 a year across four campaigns. Each one runs past its plan due to extra concept rounds, a three-person sign-off chain, and a founder who steps in whenever the client escalates.

Client B pays $60,000 a year for two campaigns that run close to plan.

The agency's running costs, salaries, rent and software, come to about $900 for each day the team works on an account.

Figures are illustrative, not drawn from a specific company.

This is just a basic example and does not by any means suggests this is what it entails to deliver a marketing project.

However, from this illustration, Client A is the agency's biggest account and its only loss. Client B pays half as much and leaves $16,000 behind. The smaller client is covering the costs of the bigger one, a classic reason for the cash drain the business likely experiences.

How to Check Whether a Client Is Profitable

The scorecard above came from six steps. If you have dozens of clients, start with your ten largest. That is where the biggest losses tend to hide.

1. Take the last 12 months.
   Use a full year so one unusual project does not decide the answer.
2. Run each project for that client through the seven-step check.
   The steps are in How Do I Know If a Project Actually Made Money?
3. Add the time no project captured.
   Account calls, status meetings, chasing payment and your own rescue hours.
4. Total what is left for each client.
   What they paid, minus everything it cost to serve them.
5. Rank clients by what is left.
   Then compare that list with your ranking by revenue. The gaps are where profit is leaking.
6. Decide what to do with each client losing money. Reprice, change the terms, or let them go. The next section covers how.

What to Do With a Client Who Is Not Profitable

Letting a client go is the last step, not the first. Work through these in order:

• Reprice at renewal, based on what the work actually takes.
• Write limits into the terms: revision rounds, approval windows and payment dates.
• Charge for the extras that keep happening. If it happens on every project, it belongs in the price.
• Let go when the terms cannot change. Losing an unprofitable client can raise profit before it raises revenue.

A business that ranks clients by revenue can grow while its profit shrinks. It is one of the patterns behind a business that is busy but not profitable.

Frequently Asked Questions

How do I know if a client is actually profitable?

Compare everything the client paid over the year with what it cost to serve them: the delivery days, the extra rounds, the waiting, the time spent chasing payment and your own hours. If what they paid is higher, the client is profitable.

What does it cost to serve a client?

Everything the business spends because that client exists: the days worked on their projects, extra revision rounds, slow approvals, account calls and updates, time chasing payment and the owner's time.

Should I drop an unprofitable client?

Not first. Reprice at renewal and write limits into the terms, such as revision rounds, approval windows and payment dates. Let the client go only if the terms cannot change.

How often should I check client profitability?

Once a year for every major client, and before every renewal or new contract.

What numbers do I need to check if a client is profitable?

What the client paid over 12 months, the direct costs of their projects, the actual days worked, the running cost of those days, and the unbilled account and owner time.