What is unprofitable? Definition and examples
Unprofitable describes a business or project that does not make a profit. It either breaks even or makes a loss. In other words, it is the state of generating a negative net income or zero profit. Not being profitable can eventually lead to bankruptcy.
Bankruptcy defines a business that cannot pay back debts it owes to creditors.
We also use the term for an effort that did no good. For example, if I say “I had an endless, unprofitable meeting with Mary,” it means our meeting achieved nothing. In this context, the term means ‘futile,’ ‘pointless,’ or ‘fruitless.’
Collins Dictionary has the following two definitions of the term:
“1. An industry, company, or product that is unprofitable does not make any profit or does not make enough profit.”
2. Unprofitable activities or efforts do not produce any useful or helpful results.”
An unprofitable business is the opposite of a profitable one or a going concern. A going concern is a company that is active and also profitable.
Customers who are unprofitable consume more of your business’ resources than they pay for. These customers divert attention and resources from a business’ profitable customers.
Salespeople dislike having to deal with customers that do not make a profit for the company.
Let’s suppose you own a Brazilian ‘Rodizio’ restaurant. In a Rodizio, there is a large cold buffet with salads, seafood, pasta, etc. Also, waiters come around with large pieces of barbecued meat and slice them onto your plate.
You can eat as much as you like for a flat fee. Let’s suppose you charge people $25 per head plus drinks.
A family comes in – a tiny 92-year-old grandma, her two 30-year-old grandchildren, and her 60-year-old son.
The grandma eats very little, so for you she is a very profitable customer. Two of the other three family members have normal appetites. Therefore, they are also profitable customers.
However, one of her grandchildren, John (30), is 6ft 8in tall, weighs 300 pounds, and eats a lot. John’s consumption of food is staggering. He can eat more than four people’s consumption combined.
For you, John is an unprofitable customer. In other words, it is going to cost you more than $20 to feed him.
In a Forbes article, Lawrence Siff writes about clients who are not profitable. A family business tried to find out how many of its 1,100 clients were unprofitable.
They were shocked to discover that 350 of them were unprofitable. In fact, they reduced the company’s profit by $2 million.
What to do
Mr. Siff has the following advice for companies with too many unprofitable clients:
– Don’t raise prices across the board. You could subsequently lose profitable clients.
– Don’t allocate costs selectively because it distorts the true picture of profitability.
– Be objective. Being emotional does not help your business become more profitable. Look at the data analytically, and then decide what to do.
– Remember the difference between profit and revenue. Profit is sales minus costs, while revenue is just sales. Do not let the notion of huge revenue entice you. Profit matters!
– Make sure your clients know about all your additional services and products. If they start using them, some clients that make you lose money might become profitable.
– Be selective when you raise prices. Some unprofitable clients may be able to absorb price rises. Be careful about raising prices on profitable clients. Do not do it to compensate for the ones that make you lose money.
– Are you over-servicing your customers? In other words, could you save money when servicing your customers without losing sales?
It might be a serious mistake to stop supplying your unprofitable customers. If you banned John from coming to your restaurant, the rest of his family might stop coming too. Your profit from three family members may be greater than your loss with John.
Video – Unprofitable clients
In this Bain & Company video, Andre Leme talks about how banks can turn around unprofitable clients. Leme is a partner with Bain’s Financial Services practice.