On the world map that hangs in most classrooms, Greenland looks about as big as Africa. In reality, Africa is fourteen times larger. The underlying Mercator projection isn’t wrong—it was designed in the 16th century for navigation and remains unmatched for that purpose to this day. It just doesn’t answer the question of how big something is.
I recently recalculated customer profitability for a client and compared two of his customers side by side. Both had generated exactly the same number of invoices during the same period. One generated approximately CHF 154,000 in revenue, while the other generated approximately CHF 11,000—a difference of fourteenfold.
On the revenue list, the two are far apart. On a list based on workload, they would be right next to each other. The same customers, the same data, a completely different ranking—depending on which column you sort by.
This is precisely where the most costly blind spot in the management of Swiss SMEs arises: A customer’s profitability is almost universally measured by revenue, because revenue is the figure that’s readily available without any extra work. But it says nothing about how a company actually makes its money.
Key Points at a Glance
- Revenue per customer and expenses per customer often result in an inverse ranking—even with the same number of invoices, one customer can generate many times more revenue than another.
- The number of tasks per customer is a useful estimate of workload when time tracking data is not available for each customer.
- Revenue concentration is the second blind spot: For the client described, two customers account for about 45 percent of revenue, and four account for about 60 percent.
- Both analyses are based on existing data and do not require a new system.
Customer Profitability: Why the Revenue List Is Misleading
Revenue per customer is an honest figure. But it’s one-dimensional. What it doesn’t show is how many transactions are behind that revenue, how many follow-up inquiries, how many corrections, and how much time was spent on coordination and administration.
In a service company, effort is primarily a matter of time. And time is not allocated in proportion to revenue. A customer with a large annual contract may require less support than one who generates small monthly amounts—each transaction involves data entry, verification, invoicing, payment tracking, and communication, largely regardless of the amount.
That’s not an argument against small customers. It’s an argument against treating them the same as large customers without first evaluating them. Because as long as only revenue is visible, the question of whether the price is commensurate with the effort remains unseen.
The approximate value that is immediately available
A comprehensive contribution margin analysis for each customer requires customer-specific time tracking. Many companies don't have this in place—and therefore put off addressing the issue.
That's unnecessary, because every accounting system already provides a good rough estimate: the number of transactions per customer. Depending on the business model, these might be invoices, deliveries, orders, or support cases. Compare this number to revenue, and the picture becomes clear.
Three key figures are enough for the first round:
- Revenue per transaction. The most direct indicator of the ratio of revenue to expenses. Values that are far apart are a red flag.
- Percentage of total revenue. Indicates the degree of dependence on individual customers.
- Outstanding balance as a percentage of revenue. Customers who generate a lot of revenue but pay late are effectively being subsidized—this costs liquidity, not profit.
What You Actually Do with the Results
The most common reaction to such an analysis is the impulse to terminate contracts with small customers. That is rarely the right answer—and is often the most expensive one.
In my work as a board member and financial officer, I’ve observed three approaches that work better. The first is pricing: When the effort per transaction is high, there’s usually simply no base fee to cover the fixed portion of the service. The second is the process: Many small transactions can be bundled—one consolidated invoice instead of twelve individual ones significantly reduces the workload without the customer losing out. The third is expectations: Some customers are costly because it was never defined what’s included in the price.
A business owner once told me that his smallest customer was his favorite—he might not bring in much revenue, but he brings in a referral almost every year. That’s a perfectly valid reason to maintain a relationship. But it should be a conscious decision, not an accident.
The Second Blind Spot: Concentration
Incidentally, this same analysis answers a question that is relevant to every board of directors: To what extent does the company depend on a small number of customers?
For the client described at the beginning, the two largest customers account for about 45 percent of revenue, and the four largest account for about 60 percent. This is not unusual for a company of this size, but it is a figure you should know before someone else calculates it: a bank prior to financing, a buyer during due diligence, or an insurer during a risk assessment.
Dealing with it is nothing out of the ordinary. You know the number, you track it over time, and you know which failure will create which gap. If you don't know that, you'll find out at the worst possible moment.
Conclusion: The Same Data, a Second Ranking
Knowing customer profitability doesn't require a new system or extensive analysis. It just requires a second column next to revenue and a willingness to review the ranking again based on that column.
The same confusion exists on the timeline: There, the invoice list shows when invoices were issued, not when the work was performed—see “Accrual Accounting: What the World Map Has to Do with It.”
The result rarely changes the entire customer base, but it usually affects pricing in two or three areas—and that has a lasting impact. I describe how this perspective can be integrated into day-to-day financial management in the section titled “CFO as a Service.”
Frequently Asked Questions
How do I calculate customer profitability without tracking time?
Use the number of transactions per customer as an estimate of the effort involved and divide the annual revenue by that number. The revenue per transaction calculated this way reliably shows which customers generate little revenue relative to the effort involved—even without exact hourly figures.
At what concentration does dependence on individual customers become critical?
There is no universal threshold, because it depends on the contract term, switching costs, and capital resources. The key is to know the proportion of your revenue that comes from your largest customers and to be able to assess the gap that a loss of business would create and how long you could sustain it.
Should I cancel my unprofitable customers?
Only in the rarest of cases. Most often, there is no base fee to cover the fixed costs of support, or the tasks can be bundled together. Termination is the last resort, not the first option.
TF Financial Services helps Swiss SMEs turn their existing accounting data into reliable performance metrics. If you'd like to know what your second ranking looks like, let's talk about it.