BUSINESS LAB · EVIDENCE BEFORE TACTICS

Which customers and products actually contribute to profit?

Compare the revenue and relevant costs of serving each product, service or customer group using consistent definitions. High sales do not necessarily create strong contribution. Separate directly traceable and variable costs from allocated overhead, and keep cash timing visible. A rough allocation can identify a question without proving that a customer should be removed.

By Sarah Mck, founder and owner of Business Lab.

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Competing explanations to investigate

Discounts, delivery, payment fees or returns vary substantially across offers.
Some customers require more rework, support or management attention than the sales total suggests.
Sales mix shifts towards lower-contribution work while total revenue grows.
A fixed-cost allocation makes a viable offer appear unprofitable or hides a genuine operating loss.

What evidence do you need?

Start with a defined period and a manageable set of products or customer groups. Reconcile revenue after agreed discounts and returns with directly traceable costs and a stated variable-cost model. Record service effort and capacity where these affect the decision. Keep shared overhead visible separately, and have accounting support validate the treatment when the decision is material.

A limited first test

Select one high-volume or high-effort segment with weak or uncertain contribution. Check the underlying transactions and service process before changing the price or removing the offer. Test a supported change in scope, delivery or pricing under clear conditions, while monitoring customer impact and the effect on shared capacity.

How to decide what happens next

Use both total contribution and contribution per constrained resource when relevant. Removing a line does not automatically remove its allocated overhead, and a product may influence other purchases. Evaluate the consequences rather than ranking solely on a percentage. Treat lifetime value and future repeat purchases as assumptions until supported.

Record-keeping resource

The U.S. Small Business Administration’s management resources provide general financial record-keeping context. Cost treatment and local reporting questions should be checked with appropriate accounting support.

Frequently asked questions

Is gross margin the same as contribution?

Not always. Cost classifications differ. State exactly which costs are included in each measure before comparing them.

Should I stop serving the lowest-margin customer?

Investigate avoidable costs, capacity and wider effects first. An allocation or a short period alone may not support that decision.

Can a profitable customer create cash pressure?

Yes. Collection timing, stock and delivery commitments can consume cash before payment arrives.

Start with the right question.

The introductory call clarifies your challenge and checks fit. It is not a full diagnosis. Outcomes depend on your business and implementation.