Valuing a Customer Transaction - PRI

I was recently discussing with someone how he values a prospective customer. Interestingly, this individual uses a matrix with different variables specific to his industry and business model. This brought me to the idea that there might be a universal way to consider the value of a customer relationship or transactioon. The outcome of this is what I call PRI.

PRI - Profit, Risk, & Influence

Seemingly any customer transaction is a function of these three things, with these being described and considered a bit different for any business.

Profit in most cases would be gross margin contribution. For a retail sale, this is just sales less Cost of Goods Sold. With construction, it is simply revenues less direct costs. In some cases, however, there may be a slight modifation of these, in that one may have to incur some type of expense not generally considered direct in order to do the business. For example, you might need to more into a larger facility with a multi-year lease in order to service a customer. Purely considered, profit is whatever you want it to be, for consideration purposes. It is up to you how you consider it.

Risk could be considered as a actuarial negative adjustment to one's profit. For example, say you may $10,000 on a transaction, but for every 100 similar transactions you will be sued at a cost of $1 million. This loss of $1 million divided by 100 is $10,000 per transaction, making it a transaction that generates no gross margin when risk is accounted. The reality is, however, that most businesses tend only to consider gross margin at its nominal value, thus adding value to considering risk separately in this PRI concept.

Influence is a subjective assessment of future business expected from this customer, whether from the same customer or referrals. This is commonly referenced with customer relationships with comments like "she'll do a lot of business with us over time" or "he's likely to send us lots of referrals." Influence is entirely subjective, but nonetheless important.

In combination, considering any customer transaction or relationship in terms of PRI PROFIT, RISK, and INFLUENCE) in whatever makes sense for your business allows you to do so in a seemingly more meaninful and comprehensive manner. I submit that simply putting the three words on a white board or evaluation sheet, either with subcategories defined or with just room for commentary, can help you consider each important customers or transactions in a more efficient and meaningful manner.