Want Profitable Growth? Start By Understanding Customer Value.

Revenue generation is a primary focus for many businesses because rising sales make companies look like they have momentum. For investors, revenue is visible, measurable and closely tied to growth. The problem is that revenue tells you how much business a customer gives you but does not equate directly to value.

As the CFO of a financial services company managing a large portfolio of leases and loans, I’ve seen this lesson play out repeatedly. Two customers can generate similar amounts of revenue while producing very different economic outcomes. One pays according to schedule, operates within standard terms and requires relatively little intervention. Another generates late payments, collection activity, servicing demands, exceptions and greater credit exposure. On a revenue report, those customers may appear equally valuable, but the first generates significantly more value than the other.

The same dynamic exists across industries. A manufacturer may absorb engineering changes and short production runs for one customer, while a software company may spend hours supporting an account whose subscription revenue barely covers the effort. A distributor may make frequent, uneconomical deliveries, and a consumer business may discover that a seemingly attractive segment has unusually high return rates. Many younger businesses view revenue and sales as universally good, but the simple fact is there is better revenue and complicated or costly revenue.

The largest customer is not always the most valuable one

Most businesses are better at measuring product economics than customer value. The costs associated with an individual account are often scattered across the organization. When a small number of customers disproportionately consume staff time, tracking can fall short. As a result, organizations can know exactly how much revenue a customer is generating while having a vague sense of what the customer truly contributes.

Kanthal, a Swedish manufacturer, produced one of the best-known examples of this problem. After developing a more detailed method for assigning selling, ordering and administrative costs to individual customers, management discovered that two of its three largest customers by sales volume were among its least profitable. The most profitable 20% of customers generated roughly 225% of total company profit, while the least profitable 10% eliminated about 125% of it.

The result becomes easier to understand when you consider how large customers often behave. They may have enough purchasing power to negotiate deeper discounts, more favorable payment terms and customized service, all while placing irregular orders or requiring significant attention. Large customers can look attractive from a sales perspective while creating substantial costs elsewhere in the organization.

Business leaders should approach reviewing their own customer base with a level of skepticism. Rather than stopping at revenue or gross margin, they should trace what happens after the sale and ask how much support an account consumes, how frequently it requires exceptions, whether it pays according to terms and on time and whether it generates rework or warranty items. The intention is to fully understand the value of every relationship in quantifiable terms.

Customer profitability can often be redesigned

Discovering that a customer is expensive to serve does not necessarily mean the company should walk away from the relationship. The bigger focus is whether the business can change the economics of these unideal customers. Customer profitability can be shaped by pricing, service levels, payment terms, minimum orders, automation and the amount of customization allowed.

FedEx offers a good example of this concept. Their pricing structure recognizes that shipments are not economically interchangeable, particularly when oversized packages, unusual handling requirements or surges in volume place additional strain on the network. Their view is that when customer behavior changes your cost, your economic model should react to that behavior. A manufacturer can charge for engineering changes, a software company can reserve high-touch service for premium tiers, a distributor can establish minimum order sizes, and a lender can adjust pricing or credit terms as risk increases.

Many companies will treat their largest accounts differently. The biggest customers sometimes receive the lowest prices, the most flexible terms and the greatest degree of customization because management is reluctant to put the relationship at risk. Sometimes this activity is warranted to keep a high-volume, profitable contract or loss leader on the books. Sometimes the economics deserve closer scrutiny because size can obscure customer value.

Growth multiplies the economics you already have

Early in a company’s life, winning an important customer can create value far beyond the immediate margin because the account may provide credibility, validate the product or create cash flow at a critical moment. The problem begins when the customizations and exceptions become the template for how the company grows.

One large customer receives customized reporting, another negotiates a unique billing process, and a third requires a different service workflow. The company adds employees to management complexity and modifies systems around individual account requirements. Over time, management may find that it has built a larger organization without proportionally improving profitability.

Customer profitability should help shape sales priorities, pricing decisions, product design and the types of customers the company actively pursues. If a business that learns its standardized mid-sized accounts generate better economics than highly customized enterprise customers, then they should leverage that insight to direct sales targets. Likewise, if a certain customer behavior drives disproportionate support costs, that information should affect how the company prices and structures relationships where that behavior is persistent.

Customer value should be a core focus of scaling businesses. Imagine adding 10% more of your best client types versus 10% of your lowest-margin, most costly ones. Understanding customer value should be a driving factor in decision-making.

Revenue generation is a primary focus for many businesses because rising sales make companies look like they have momentum. For investors, revenue is visible, measurable and closely tied to growth. The problem is that revenue tells you how much business a customer gives you but does not equate directly to value.

As the CFO of a financial services company managing a large portfolio of leases and loans, I’ve seen this lesson play out repeatedly. Two customers can generate similar amounts of revenue while producing very different economic outcomes. One pays according to schedule, operates within standard terms and requires relatively little intervention. Another generates late payments, collection activity, servicing demands, exceptions and greater credit exposure. On a revenue report, those customers may appear equally valuable, but the first generates significantly more value than the other.

The same dynamic exists across industries. A manufacturer may absorb engineering changes and short production runs for one customer, while a software company may spend hours supporting an account whose subscription revenue barely covers the effort. A distributor may make frequent, uneconomical deliveries, and a consumer business may discover that a seemingly attractive segment has unusually high return rates. Many younger businesses view revenue and sales as universally good, but the simple fact is there is better revenue and complicated or costly revenue.