Most of us are in the habit of measuring profit by product or service. We know that the large extra pepperoni is more profitable than the medium cheese.
But do you know that this thinking is wrong? We’ve been brainwashed into believing that marketing is all about products. The truth is, profitability needs to be measured by customer. Which customers are the most profitable? How do you calculate that?
Sort your constituents by the amount they spend over a period of time (a simple Excel spreadsheet will work just fine).
Group them into buckets for the sake of time (i.e., all customers who spent $40 to $55 over a period of 12 months).
For each group, subtract all costs so that you’re left with the difference between that and the amount spent. That amount is individual profitability.
Taking overall revenue and dividing by individual profitability will give you a profit percentage for each of your buckets.
Here is a simple example: Assume that the Johnson family spent $10,000 on pizza last year. They order every week by calling in. They never know what they want, so it takes an extra minute on each call. They always use a coupon and live on the outer edge of our delivery area.
A second customer, 22-year-old Bill, lives in the neighborhood and spent $3,000 on pizza last year. He responds to your email and orders online. He always gets the loaded meat pizza and picks it up at the store.
Who is the most valuable customer? I don’t know. But you need to know for your business, ...