The Revenue Trap
"They're our biggest client." "They've been with us for years." "They keep us busy."
None of that means they're profitable. Revenue is vanity. Profit is sanity. And some of your "best" clients might be quietly killing your margins.
The Client Profitability Formula
Simple in concept. Hard to calculate without tracking time and costs by client.
A Tale of Two Clients
Let's compare two clients who both pay you $50,000/year:
| Metric | Client A | Client B |
|---|---|---|
| Annual Revenue | $50,000 | $50,000 |
| Hours Worked | 500 | 1,000 |
| Realized Rate | $100/hr | $50/hr |
| Labor Cost (@ $38 floor) | $19,000 | $38,000 |
| Materials/Direct Costs | $8,000 | $8,000 |
| Gross Profit | $23,000 | $4,000 |
| Margin | 46% | 8% |
Same revenue. Client A generates 5.75x more profit than Client B.
If you replaced Client B with another Client A, you'd make $19,000 more per year with no additional capacity.
The Hidden Costs of "Difficult" Clients
Revenue and hours don't tell the whole story. Some clients cost you in ways that don't show up on a timesheet:
- Scope creep — endless revisions, "one more thing"
- Slow payments — cash flow drag, collection effort
- Emergency demands — disrupts other scheduled work
- Management overhead — requires constant hand-holding
- Team stress — people dread working with them
- Opportunity cost — the better client you could have served
A client paying $100k who requires twice the hours and three times the headaches might be less profitable than a $40k client who's easy to work with.
The Client Profitability Stack
Rank your clients by profit contribution—not revenue. You'll usually find something like this:
| Tier | % of Clients | % of Profit | Action |
|---|---|---|---|
| A-Tier (Stars) | 20% | 80%+ | Protect, nurture, find more like them |
| B-Tier (Solid) | 30% | 15% | Maintain, look for upsell opportunities |
| C-Tier (Marginal) | 30% | 5% | Raise prices or reduce service level |
| D-Tier (Losers) | 20% | 0% or negative | Fire or dramatically reprice |
Most businesses have 20% of clients generating 80% of profit. The bottom 20% often generate zero—or actively lose money.
The Fire-This-Client Math
Firing a client feels scary. But sometimes it's the most profitable decision you can make.
Before firing, calculate:
- How many hours does this client consume?
- What's their realized rate?
- What's your capacity to replace them?
- What realized rate could you get from a replacement client?
| Current Client | Replacement Client |
|---|---|
| $50,000 revenue | $50,000 revenue |
| 1,000 hours worked | 500 hours worked |
| $50/hr realized rate | $100/hr realized rate |
| $4,000 profit (8%) | $23,000 profit (46%) |
How to Fire a Client (Professionally)
- Raise prices — They either become profitable or leave on their own
- Reduce service — Match service level to what they're paying for
- Give notice — "We're restructuring and can no longer serve you after [date]"
- Refer out — Hand them to a competitor (yes, really)
- Let the relationship end naturally — Stop chasing renewals
Bottom Line
- Revenue ≠ Profit. Rank clients by profit contribution.
- Your biggest client might not be your most profitable
- Firing unprofitable clients frees capacity for better ones
- Price for the clients you want, not the ones you have
You Made It
That's the complete toolkit: Floor Rate → Survival Number → Utilization → Realized Rate → Capacity → Client Profitability. These six concepts explain 90% of why service businesses struggle to turn revenue into profit.
The math isn't complicated. The hard part is tracking it consistently and making decisions based on what the numbers say—even when it's uncomfortable.
If you want help applying these concepts to your specific situation, that's exactly what we do.
Let's Talk →