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How to tell if a client is profitable

Journalists get online and know when to say goodbye

Knowing when to say so long, farewell, auf wiedersehen,  adieu to clients is as easy as maths. Determine their true value to your business, and make sure you have a good spread of clients making up your income = too much of your income coming from one client is too great a risk, as is a low paying client who takes up too much of your time.

Knowing if a client is truly profitable for your business can be handwringingly difficult. Often the cheapest clients, already paying you the least per hour / word / headache, are the biggest drain on our time and emotions.

Having a clear view of what you need to be earning over the year is, of course, essential in your business. It's easy to take those figures one step further to determine, clinically and mathematically if you're in your sweet spot with a client, or if it's time to say so long (farewell, auf wiedersehn, adieu).

1. DETERMINE THE FIXED COSTS OF RUNNING YOUR BUSINESS

First get your numbers clear. You can do this with last year's figures in mind, if you've been in business that long, or limit your calculations to a typical month. At this point, we are determining the percentage of your income each client represents

  1. Add all of your fixed costs for running your business: your phone, rent, mortgage, software, subscriptions, insurances, utilities.
  2. Divide fixed costs by number of customers you have - it doesn't matter if you've written one article for them, or you file weekly, we are just counting the number of clients you have, in order to get an average.
  3. This gives you an average cost per client:

Eg: Business X fixed costs = $10000, divided by Business X clients = 20.

Business X average cost/client = $500

2. DETERMINE YOUR FIXED COSTS FOR RUNNING EACH JOB

Knowing how much each job costs is crucial. My team and I use time doctor software to track our hours. It prompts you, reports well and, (yet to shed the shackles of a catholic upbringing), i seem to respond well to an entity watching my every move.

Determine the hours each project takes, (for the benefit of this process, guestimate the hours that a typical project took). Factor in any additional costs - software purchases, travel, parking, anything you're out of pocket on.

Project X = Fee - Costs

Eg: $2000 fee - ($500 [your time] + $500 [average running cost for client])=  $1000

3. PROFIT PERCENTAGE

With these figures, you can now determine what percentage each job/each client represents.
If you have an income (for mathematical convenience.... remembering as a book keeper i'm a fairly good web builder) of $50 000 and this client has given you a margin of $1000, they represent 2% of your profit.

It's best to have a good mix of clients delivering into your income: the 2%-ers are ok, if it's a very efficient task, but it they're a headache , entirely not worth the trouble, AND, they're sucking your time so you're not finding the great clients.

The large clients, representing 50% or more are a difficulty as well - they've got too much of your business tied up with them. If they disappeared tomorrow, so would your business.

Look for clients who deliver good margins - 10-30% of your income and if you find a truly sweet spot, find more more more of those clients. The more you know about these perfect positions, the easier it is to find these clients again.

KNOW YOUR NUMBERS TO KNOW YOUR SWEET SPOT

Knowing your numbers is key. You can then decide, better, which size client, compared to your total income is too small or too big.

Knowing your ideal client is key also - read our ideal client post for more information on niching. Such efficiencies are key to business growth and profit.

Further reading:

Profit first:  Mike Michalowicz

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