A Framework to Improve Client Profitability
How a 100-year-old idea can outline valuable clients
“80% of the effects come from 20% of the causes.”
Vilfredo Pareto put forward this idea in 1906. The Italian economist had just completed a review of his country’s land ownership. The takeaway point that has immortalised him since, was that 80% of Italy’s land was owned by 20% of its residents.
The Pareto Principle centres on the belief that outcomes are not evenly distributed. Equal inputs do not lead to equal outputs. His original insight has become a placeholder for lopsided returns — good and bad.
A century later, and in a vastly different world, Pareto’s revelation holds true.
- 80% of Microsoft Windows and Office errors were the result of 20% of bugs.
- 80% of investment growth comes from 20% of a portfolio.
- 75% of an airline’s profit can come from 12% of its passengers (first class).
For businesses, the Pareto Principle can spotlight areas of improvement. Knowing the few, but powerful operational drivers can refine processes and manage resources strategically.
Of utmost significance, understanding this concept can provide clarity in terms of client profitability.
All clients are equal, but some are more equal than others. Often a small group of customers will use a disproportionate amount of a company’s services in onboarding, support, technical configurations, billing queries, etc. They represent excess time and expenses, cratering companies’ bottom lines.
And that’s where a Cost to Serve Analysis comes in. It is an exercise that looks at each client’s profitability. The desired outcome is to locate the minority of clients who account for the majority of costs, and vice versa.
Let’s borrow from Pareto again:
“If you’re Noah, and your ark is about to sink, look for the elephants first because you can throw over a bunch of cats, dogs, squirrels…and your ark will keep sinking. But if you find 1 elephant to get overboard you’re in much better shape.”
A Cost to Serve Analysis is about finding your company’s elephants.
What is a Cost to Serve Analysis?
It’s a framework to examine how expensive clients are to support and maintain for an organisation. A Cost to Serve Analysis breaks down service costs to outline account profitability, relative to revenue.
This is completed by aggregating data from multiple departments to provide a unified customer view. It is assessed by product line but can be combined for a holistic appraisal. An annual cadence is best.
A Cost to Serve Analysis is as much about controlling costs as it is understanding them. A critical takeaway is to outline where — not just with whom — departments are spending their time.
Carrying out a Cost to Serve Analysis
1. Aggregate client details
Like any financial review, start with the top line (revenue).
Export from your CRM all accounts related to a product line. Split out product line and total revenue. Include any account details (sector, team size, location) that can provide insight when analysing later.
Example: Say you work for a SaaS HR platform — HR Inc — that helps clients onboard and manage their employees.
HR Inc’s client export could look like:
Above is a starting point. More details can be added for greater precision, e.g. onboarding length, partner channels, previous providers.
2. Group service costs
The next step is to understand where service departments are spending time.
A service department is any internal team that directly supports live customers. This could be: onboarding, (client) project management, support, account management, etc.
To begin, determine an hourly wage for each department:
All department salaries / Number of employees / Work hours per FTE
HR Inc continued:
Then, outline key tasks (projects/tickets/calls) that are completed for a client within a service department. If support, it could be inbound tickets. For account management: calls, demos, on-site meetings.
Export data that tracks these key tasks. This may be from a CRM, support ticketing system, or project management software.
Time is the crucial unit of measurement. Combine tasks for each client within a department to get a total time (in hours). For example, if a client had 20 support tickets, totalling 600 minutes: divide by 60 and note 10 hours.
Lastly, multiply time spent for a client by the department’s hourly wage.
HR Inc’s top clients in terms of support costs:
Repeat the steps above for each service department.
If time is not tracked use estimates for key tasks. For instance, account management could peg each email sent to a client at 5 minutes.
Eventually, you will be able to see all costs linked to an account:
Pull it all together and you can see which clients are all stars and which ones anchors:
3. Analysis
The final step is to look for common themes amongst low and high service clients, respectively. Include as many internal and external details as possible. Explore recurring trends that spark further investigation.
There may be many factors to consider:
Is there a sales correlation? Is an individual marketing a vastly different experience than what the company can deliver, leaving others to fill the gaps?
What about sectors? Are certain industries more/less receptive to solutions offered?
What about user setup? Is there a difference between centralised and decentralised user structures?
Or maybe a certain distribution channel is most effective?
Analysis can also be inverted.
Instead of looking client-by-client, a wider angle can be applied. For instance, you can examine if certain regions have more profitable clients.
Data will not provide the full answer but rather brighten beacons of curiosity. Eventually, statistics need to be contextualised with the help of other departments and user interviews.
Scrutinising service costs is as much about improving customer experience as it is profit margins. Clients with high touchpoints are often reaching out because something’s not right. Numerous interactions may mask a deeper issue, e.g. product workarounds or misaligned expectations.
Once hypotheses are formed, mitigation (high cost to serve) and expansion (low) playbooks can be created.
Mitigation strategies can take many forms: changing target customers; digitising manual tasks; creating self-serve opportunities; or even offboarding. Expansion playbooks are centred on replicating actions and strategies of high margin clients to a broader base.
As you execute on playbooks, do not hesitate to change tack as new information proves/disproves hypotheses.
Test, measure, modify — repeat.
Benefits
A Cost to Serve Analysis has several merits but 3 are worth highlighting: profitability, scale, and warning indicators.
To the surprise of nobody, profitability is a major benefit. Companies replace hearsay with hard data. Team members may have strong intuitions regarding costly clients but specifics can be fleeting. This approach provides a detailed starting point for analysis and action.
Scale is another valuable outcome. Generating more output with fewer inputs is vital as a company moves from small startup to vast enterprise. After examining where departmental time is spent, technological or operational solutions can reduce effort while maintaining client satisfaction.
For example, creating a user help centre can let clients solve problems themselves. Likewise, UX improvements or 3rd party services (e.g. onboarding software) can reduce user queries. These initiatives can increase the number of clients managed by 1 employee.
Finally, an early high cost client can be indicative of what’s to come. High onboarding costs may represent a high number of users…which may result in managing many stakeholders…which may result in more support tickets. Knowing the warning signs can protect profit margins before a tougher conversation is needed. Equally, it can help guide pricing decisions.
A Cost to Serve Analysis is one tool amongst many to gauge client and operational health. It’s important to have multiple perspectives and metrics. If customers with low service costs similarly have low satisfaction (NPS) scores, a cause for concern is rightfully justified.
By assessing the underlying factors that contribute to customer costs, organisations can outline a path to profitability and structured growth.
