Ask a business owner who their best client is, and the answer is usually the one that pays the most. Revenue is easy to see; the cost of serving a client is not. A large client that asks for constant changes can earn the company less than a small one with a clear brief.
The free PLYNT business scan has three questions in its Margin category: what share of revenue comes from the single biggest client, whether retainers have been re-costed against today’s real costs in the last 12 months, and what share of clients you suspect are unprofitable. The last one carries the most weight, because a suspicion that nobody has checked is the most common margin problem.
Contribution before overhead
The measure that answers the question is contribution before overhead: what a client or project brings in, minus what it cost to deliver, before company-wide costs such as rent or management are shared out.
A worked example. A project is worth $8,000. The team spent approved hours on it that cost $4,700 at internal cost rates, and there were $500 of direct expenses. Delivery cost is $5,200, so the project contributes $2,800, or 35% of its value. That contribution is what pays for the rest of the company.
Finding an internal cost rate
To turn hours into money you need a cost rate per person or per role: the full monthly cost of that person, including employer taxes and benefits, divided by the hours they are available for work in the month. For example, a monthly cost of $3,000 and 140 available hours gives a rate of about $21.40 an hour. Use the same method for everyone and review it once a year.
A three-month client review
- Take the last three full months, so one unusual month does not decide the result.
- List every client with the value invoiced for that period.
- Add the approved hours for each client, multiplied by the cost rates.
- Add direct expenses: freelancers, media, licences bought for that client.
- Calculate contribution and contribution as a percentage of value.
- Sort the list and look at the bottom three first.
This only works if the hours are real. If a large share of worked time is never logged, the result will flatter every client. Fix time tracking first, or treat the numbers as a lower limit on cost.
What to do with a low-contribution client
- Reprice when the work is right but the fee is old.
- Narrow the scope when the client asks for more than the agreement covers.
- Change the process when rework or long approval cycles drive the cost.
- Let the client go only when none of the above is possible, and with the numbers in hand.
Concentration is a separate risk
A client can be highly profitable and still be a risk. In the scan, more than half of revenue from one client falls in the highest-risk band. The answer is not to drop that client but to know its real contribution and to plan how the company would cope if the relationship changed.
Retainers need re-costing
A monthly retainer priced a year ago was based on last year’s salaries and last year’s workload. Once a year, compare its fee with the approved hours and direct costs of recent months. If the contribution has fallen, you have a fact to discuss rather than a feeling.
Common mistakes
- Sharing overhead across clients by revenue, which hides the real difference between them.
- Using hours that were estimated rather than hours that were approved.
- Comparing a client’s value for one period with costs from another.
How PLYNT supports this
In PLYNT each client shows payments, outstanding invoices, approved time and direct costs together, and unallocated company overhead stays separate, so the figure you read is contribution before overhead. See finance and costs, client context and the glossary.
To see how your margins score, take the free business scan.