Customer profitability: which contracts actually support your business?
Assess customer profitability in layers: net sales, directly attributable costs and the cost of the capacity used. Keep shared overheads separate before allocating them. Your largest customer may not contribute the most to profit.
One customer generates substantial revenue but constantly needs your team’s attention. Another buys less and requires little support. For owners of SMEs and startups, the useful question is which contracts to develop, renegotiate or deliver differently.
Start with the contract and a consistent period
Use a month for recurring delivery or the full delivery period for a project. Match net sales after discounts and credits with the costs of those same services. An advance invoice alone does not measure completed work.
- Net sales and work delivered during the period.
- Purchases, external delivery, shipping and commissions attributable to the customer.
- Production, coordination, rework and support time.
- Unpaid invoices, collection dates and remaining delivery commitments.
Value time without counting payroll twice
Set a documented internal hourly cost using team costs and realistic productive capacity. Do not add labour again if it is already included in a direct cost. Show contribution before and after the time consumed. Allocating a fixed salary to a contract explains capacity use; it does not mean the salary disappears when the contract ends.
Fictional example: revenue does not determine the ranking
Entirely fictional monthly figures, excluding tax. Customer A generates €30,000 of sales, €9,000 of direct costs excluding the team and 240 hours valued at €50, or €12,000. Contribution after these costs is €9,000. Customer B generates €20,000 of sales, €5,000 of direct costs and 80 hours at €50, or €4,000. Contribution is €11,000.
B contributes more despite lower revenue and uses less capacity. Neither amount is net profit: shared overheads, financing and tax still need to be considered. These are examples of a method, not client results.
Renegotiate, improve delivery or stop: different decisions
Before ending a contract, identify avoidable costs and whether the team can be reassigned. If payroll and rent stay unchanged, losing positive contribution can reduce total profit. First assess clearer scope, charging for additional requests, different pricing or a less costly delivery process.
What to review each month
Compare contribution in currency, planned and actual hours, unbilled work and late payments. Keep allocation rules consistent. If data is incomplete, start with contracts consuming the most capacity and clearly mark estimates.
For several offers, see profitability by business activity. See how differences become practical decisions in our fictional monthly report. Mercova helps owners interpret these figures and follow through on actions over successive months.
Frequently asked questions
Should I stop serving a customer with a low margin?
Not based on a percentage alone. Compare contribution, avoidable costs, released capacity and realistic replacement opportunities.
What if we do not track time?
Start with documented estimates for selected contracts, then measure time over a representative period. An explicit estimate is more useful than invented precision.
Which changes would improve your profitability?
See how to compare pricing, costs and volume before deciding where to act.
Find ways to improve profitability