Why Does Customer Profitability Matter More Than Customer Volume for Some Businesses?

Retailers often focus on attracting more visitors, but higher foot traffic does not automatically lead to higher profits. Some customers may cost more to serve than they bring in through purchases.

Customer Profitability helps businesses understand which customers contribute most to the bottom line. By looking beyond visitor numbers, managers can make better decisions about where to invest their time and resources.

How Brands Stop Eliminating Expensive Costs in Customer Profitability

Some customers require more support than others, which can affect a company’s profits. For example, a customer who frequently calls a phone company’s support center may require many hours of staff time, making the account costly to serve.

Customer Profitability helps businesses assess how much each customer contributes after service costs are considered. McKinsey’s research on retail banking suggests that a company’s least profitable 20% of customers can account for a significant share of its losses. Rather than simply ignoring these customers, businesses can review why serving them is costly and consider ways to support them more efficiently.

A clothing retailer might earn more by selling luxury leather jackets to a smaller group of customers than by selling inexpensive cotton socks to many more shoppers. Customer Profitability helps managers understand which customers and products contribute most to the business’s profits.

Harvard Business School research suggests that a company’s top 20% of customers can generate 150% of its total profit, offsetting losses from less profitable customers. This can help retailers decide where to focus their marketing, while ensuring they continue to serve all customers fairly.

Online clothing stores can lose money when customers frequently return products. For example, if a shopper sends back a pair of blue jeans, the retailer may have to cover shipping costs in both directions. Frequent returns can reduce Customer Profitability.

Gartner reports that product returns cost online retailers $38 billion annually. Rather than automatically blocking customers who make repeated returns, retailers can look for ways to reduce preventable returns, such as providing accurate sizing information and clear product descriptions. This can lower costs while preserving the customer relationship.

Marketing managers can waste significant money when they place digital ads without a clear strategy. Customer Profitability analysis helps businesses identify which customer groups generate the most value, so they can focus their campaigns more effectively.

Businesses need reliable monthly revenue, especially during economic downturns when some customers may cut back on spending. Customer Profitability analysis helps companies identify customers who provide lasting value and remain loyal over time.

For example, a software company may earn recurring subscription revenue from large corporate clients. Bain & Company reports that increasing customer retention by 5% can raise profits by 25% to 95%. By tracking Customer Profitability and investing in strong customer relationships, businesses can support more stable revenue.

Some shoppers buy products only when they are heavily discounted and may not return once the sale ends. Customer Profitability analysis helps businesses understand whether these purchases contribute to long-term value or simply reduce margins.

Also read: Why Does Creator Licensing Matter When Brands Reuse Influencer Content in Advertisements?

As we discussed in our previous article about Pricing Power and Commoditisation, constant discounting can make it harder for a retailer to maintain profitable prices. Premium stores may choose to focus on customers who value their products and are willing to pay full price, helping protect margins and support steadier revenue.

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–Written by Rajnish Kumar, a copywriter and strategist with a background in fast-paced journalism, who explores the gap between what brands promise and how consumers actually behave.