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Customer Profitability Analysis

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❶Kasturi; Moriarty, Rowland T. The context is the business-to-business order-handling industry, i.

What is Customer Profitability Analysis?

For the attainment, servicing, and retention of its customers, the company is required to provide consulting and service visits, as well as process the sale orders. Individuals require only one site visit before placing an order. SMEs require more frequent visits, as they are based in multiple locations and are provided with after-sale service as part of the bulk purchase. From the given example, the customer profitability of the Individual segment exceeds the SME segment. This insight then supports the company in its strategic decisions.

It can shift its focus towards attracting and retaining more customers from the more profitable Individual segment. Alternatively, it can look for cost reduction approaches for its SME segment.

Potentially, it can work to redesign its purchasing process in order to reduce the frequency of visits or orders. Otherwise, it can look to charge its customers for additional service visits to shift the weight of the cost from the company to the customer. This insight might not be attainable from traditional reporting methods. One of the most common marketing metrics of sales per segment may also be misleading. In a bank, an episode related to availing home loan for buying of a house is a very special occasion to the customer, occurring perhaps once or twice in his or her lifetime.

Thus, the customer has little or no experience of how to behave in the episode or what the issues are in which he or she should be interested. On the other hand, the withdrawal of funds from an ATM is an episode with which the customer is very familiar, and thus the customer can be expected to assume a greater role in the production of the episode.

Each episode is, in its turn, built out of a specific set of activities. Profitability can thus be analysed at four levels: Different aspects of profitability become important on the different levels.

Investing in customer relationship can be regarded as long-term, and therefore customers could be viewed as fixed assets. On a customer-base level, the key tool for analysis is the distribution of profitability within the customer base. The distribution can be used to measure the sensitivity of the customer base because it indicates how dependent the company is on a few customers and shows the cross-subsidizing effect in the customer base.

This, in turn, can be used to compare different customer bases as to their potential value and risk profile. You must be logged in to post a comment. Profit Impact of Marketing Strategy. Product Cost Dynamics Explained with diagram. In other words, customer profitability depends not only on the revenue resulting from sold units of a product or service, but also on the 'back end' services provided, including marketing, distribution, and customer service.

According to Harvard Professors: Robert Kaplan who is co-developer of activity-based costing and V. Narayanan, the Pareto rule does not apply to customer profitability for organizations. The whale curve for cumulative profitability see picture usually reveals that the most profitable 20 percent of customers generate between percent and percent of total profits.

The middle percent of customers break even and the least profitable percent of customers lose from 50 to percent of total profits, leaving the company with its percent of total profits. Typically companies have both: Often even managers who understand the issue are not able to easily distinct between customers belonging to these 2 groups. The main purpose of CPA is to provide to organization management with the understanding of each customer profitability.

Calculation of customer profitability takes into account both revenue associated to each customer, as well as all costs which can be attributed to the customer. CPA requires a company to associate all company's revenue to different customers sources of revenue , in order to find out revenue associated to each customer.

Companies most typically have no trouble finding out the amount of revenue attributed to a particular customer, thus article will not cover this aspect. Customers differ in costs they generate by using company's resources in a different way. These reasons may include:. CPA requires the company to associate all company's costs to different customers, even if the costs are not directly related to any particular customer.

Some costs can be easily associated with a particular customer i.

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How can customer profitability analysis (CPA) help your organisation - and how can you conduct it successfully? Apart from the financial services industry, profiling customer profit contribution or potential for profit at the individual level is rarely practiced.

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Customer Profitability Analysis is a tool from managerial accounting that shifts the focus from product line profitability to individual customer profitability. Activity Based Costing looks at the various cost drivers to accurately isolate costs and determine a product’s profitability.

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Customer profitability analysis - approach The general approach to CPA is based on segmenting the customer base to determine the revenues and costs attributable to each segment. An approach to segmental analysis that is of increasing interest is Customer Profitability Analysis (CPA). If marketing effort is to be directed at customers or at market segments with greater profit potential, it is essential that marketing managers have information showing both the exiting picture.

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customer profitability analysis (cpa) CPA is an ABM technique using ABC principles to identify the most profitable customers. Customers are categorised in different groups with different activity profile. Customer profitability analysis The potential Benefits of Customer profitability analysis (CPA) Customer profitability analysis (CPA) providing the uneven distribution of cost and revenue of customer. The information of the cost bear by the customer proves to be priceless. As the revenue.