Most founders know their overall profit margin but can't answer a more important question: which customers, products, or services are actually making money? Without that visibility, you're making strategic decisions blind. This article explains how to analyze profitability by segment and why it matters for growth-stage businesses.
A founder came to us confident and relieved. "We're profitable!" Revenue was strong. The P&L looked good. The whole team was celebrating.
I asked one question: "Which type of customer is most profitable?"
Silence.
That silence costs founders millions every year. Because profit isn't a single number. It's the sum of every customer, every product, every service you offer. Some of these are making you money. Some are losing it. And if you can't tell the difference, you're making decisions blind.
When we dug into that founder's numbers, we found a customer segment where most of the customers were actually costing the company to service them.
On paper, everything looked fine. Revenue was growing. The overall margin seemed healthy. But underneath that headline number, some customers were generating strong profits while others were quietly draining cash with every invoice.
The profitable customers were subsidizing the unprofitable ones. And because this founder couldn't see the difference, they were investing equally in both. Marketing dollars went to attract more of the wrong customers. Their team spent disproportionate time on accounts that would never be worth the effort.
This is what I call the revenue illusion: you're making money overall, but you can't see where it's actually coming from or where it's leaking away.
Most founders track one profit number: net income. But that single figure hides more than it reveals.
Ready FoundersTM (growth-stage business owners preparing for scale or exit) track three types of margin:
Gross margin is the percentage of revenue remaining after subtracting direct costs.
Gross margin tells you how much you keep before overhead expenses.
Contribution margin shows what's left after accounting for all variable costs specific to each product, service, or customer segment. This includes:
Contribution margin reveals which parts of your business actually generate profit to cover fixed costs.
Net margin is your bottom line after everything: overhead, operations, administration, all of it.
The founders who build valuable businesses know all three. More importantly, they know these numbers by segment, whether that's by customer, product line, service offering, or some combination.
I hear this pushback often: "We're a service business. We don't have products to analyze."
You do. You just call them something else.
For agencies, your "products" might include:
For consulting firms, your "products" are engagement types:
Every service business has segments that behave like products when you analyze profitability. The question is whether you've identified yours.
We analyzed their customer data the way we'd analyze product profitability:
What we found changed everything: Almost all their profit came from one specific customer segment. The rest were either breaking even or losing money.
Once they saw this, they made a dramatic shift:
The result? They eventually sold the business for over $30 million. Not because they grew revenue everywhere. Because they focused on the customers who actually made them money.
Profitability isn't just about costs. It's about what you charge.
Most founders underprice. They look at competitors and worry about losing deals, so they set prices based on fear instead of value.
If you're not losing some deals on price, you're probably not charging enough.
One service business we work with was stuck at the same revenue level for three years. They were busy, but they couldn't seem to grow. When we analyzed their situation, the answer was simple: their pricing hadn't changed in five years while their costs and capabilities had grown substantially.
They were afraid to raise prices. They thought they'd lose clients. But when they finally adjusted their rates to reflect the value they actually delivered, something unexpected happened:
Their profit nearly doubled within a year. Same team. Same services. Different price.
Before you can optimize profit, you need visibility. Ready Founders can answer these questions:
If you can't answer these questions with confidence, you're optimizing blind.
You don't need to rebuild your entire financial infrastructure overnight. Start with these three steps:
Pick the three offerings that generate the most revenue and figure out what they actually cost to deliver. Include:
Be honest about the numbers.
List your top ten customers by revenue, then rank them by profitability. These are often different lists.
The customer who pays you the most isn't always the customer who makes you the most money. Some high-revenue customers come with high costs: demanding service requirements, custom work, scope creep, payment delays. Others are profitable precisely because they're low-maintenance.
Schedule a monthly P&L review focused on margins, not just revenue. Revenue growth feels good. Profit growth builds wealth. Make sure you're tracking both.
Optimizing profit isn't always about cutting costs or raising prices today.
Sometimes the right move is investing in growth that will generate profits later. The question is whether you're making that trade-off intentionally or accidentally.
When to prioritize growth:
When to prioritize profit optimization:
Ready Founders know when they're investing for growth versus optimizing for profit. They make that choice deliberately, based on data, not based on whatever feels right in the moment.
The worst position is not knowing which mode you're in.
When you have true profit visibility, your decisions get easier and your business gets stronger.
You stop chasing revenue for revenue's sake. You start building a business that's worth something.
That's what separates founders who work hard from founders who build wealth.
Pick one segment of your business, whether that's a customer type, a product line, or a service offering, and calculate its true contribution margin.
Include everything: the direct costs, the overhead allocation, the hidden expenses that don't show up on a simple P&L. Be ruthlessly honest.
Then ask yourself:
That single analysis will teach you more about your business than months of revenue reports.
Profit by product (or profit by segment) is a financial analysis that breaks down profitability at the individual product, service, or customer level rather than looking only at overall company profit. This reveals which parts of your business are actually generating profit and which are losing money.
Contribution margin equals revenue minus all variable costs associated with that product, service, or customer segment. Variable costs include direct labor, materials, sales commissions, and any other costs that scale with that specific offering. The formula is: Contribution Margin = Revenue - Variable Costs.
Service businesses have segments that behave like products when analyzed for profitability. These might include different client types (retainer vs. project), different service offerings (strategy vs. implementation), or different customer sizes (enterprise vs. small business). Each segment has different costs to serve and different margins.
Most growth-stage founders benefit from monthly margin reviews at minimum. Quarterly detailed reviews of segment-level profitability help identify trends and inform strategic decisions about pricing, resource allocation, and customer focus.
Want the visual summary? Download the PDF version here.
The Ready Founder™ is part of One Degree Financial's commitment to helping founders gain the financial clarity and confidence they need to scale and exit successfully.
Ready to see what your numbers are really telling you? Book a conversation to discuss building profit visibility in your business: Schedule a conversation.
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About the Author: Rod Loges is CEO of One Degree Financial and host of the MILCOM Founders podcast, where he helps veteran entrepreneurs build businesses with strong financial foundations.