Most companies know their gross margin by product. Far fewer know their profit by customer once the full cost to serve is included: discounts, special delivery terms, small and frequent orders, returns, credit days, technical support and sales effort. When they calculate it, the result is almost always surprising.
Reading the whale curve
Rank customers from most to least profitable and plot cumulative profit as a share of the total. The curve rises above 100%, peaks and then falls back to 100%, because the customers at the end lose money. Its shape, like the back of a whale, gives it its name.
In this example the most profitable fifth of the customers earns 113% of the company's profit on its own. Profit keeps growing until about 47% of the customer base, where it reaches 148%. The remaining customers give back roughly a third of everything the profitable ones earned. The company is, in effect, paying to serve half of its customers.
What to do with unprofitable customers
The answer is rarely to drop them. Most unprofitable customers are unprofitable because of how they are served, not because of who they are. The whale curve is a map of where to change the terms.
- Reprice the service: minimum order sizes, delivery fees, charges for urgent orders or extended credit.
- Change the channel: move small accounts to digital ordering or to distributors, and focus the sales force on accounts that can grow.
- Review the discounts: discounts negotiated years ago often outlive the volumes that justified them.
- Protect the whales: the customers at the top of the curve deserve the best service, because losing one of them costs more than all the others combined can recover.
Bartor S.
Founder
