Some Customers Cost You Money.

What they were looking at

Robert Kaplan, the Harvard accounting professor who developed activity-based costing with Robin Cooper, spent years helping companies work out what it really cost to serve each customer. Not just the cost of the product, but the orders, deliveries, support calls, custom terms and account management each customer used up.

Once those costs are assigned customer by customer, you can rank every customer from most to least profitable and keep a running total of profit as you go down the list.

What they found

The running total doesn’t climb smoothly to 100%. It shoots past 100%, flattens out, then falls back to 100% at the end of the list, because the customers at the bottom lose money. Plotted, it looks like a whale breaking the surface, which is where the name comes from.

“The shape of the curve in Figure 1 occurs in virtually every customer profitability study ever done” Kaplan, “A Balanced Scorecard Approach to Measure Customer Profitability,” HBS Working Knowledge, August 8, 2005

In the example he describes:

“the most profitable 40 percent of customers generate 130 percent of annual profits” Same

The middle 55% break even, and the least profitable 5% lose the equivalent of 30% of profits. Across studies, the Institute of Management Accountants, citing Kaplan and Narayanan, puts the usual range wider still:

“Typically, about 20% of customers generate anywhere from 150% to 300% of company profits” IMA, Statement on Management Accounting: Customer Profitability Management (2010), p. 2

By the IMA’s account, the bottom tenth of customers can destroy anywhere from 50% to 200% of profits.

What it means

The power law in revenue turns into something sharper in profit. The tail isn’t just small. Once you count what it takes to serve them, part of it costs you money.

That means a business can grow its customer count, its revenue and its costs together and watch profit fall, because the growth came in at the wrong end of the curve.

Where it shows up in a revenue team

• Cost per acquisition counts the cost to win a customer, not the cost to serve one. The whale curve is what happens after the sale.
• High-touch, low-value accounts (custom terms, heavy support, small orders) sit at the far end of the curve.
• Volume-based acquisition fills the tail. The cheapest customers to win are often the most expensive to keep.
• The answer usually isn’t firing customers. It’s knowing which ones you’re paying to acquire more of, and stopping.