Customer profitability

Customer profitability

Customer profitability (CP) is the difference between the revenues earned from and the costs associated with the customer relationship in a specified period.

According to Philip Kotler,"a profitable customer is a person, household or a company that overtime, yields a revenue stream that exceeds by an acceptable amount the company's cost stream of attracting, selling and servicing the customer"

Contents

Uses

Although CP is nothing more than the result of applying the business concept of profit to a customer relationship, measuring the profitability of a firm’s customers or customer groups can often deliver useful business insights.

Quite often a very small percentage of the firm’s best customers will account for a large portion of firm profit. Although this is a natural consequence of variability in profitability across customers, firms benefit from knowing exactly who the best customer are and how much they contribute to firm profit.

At the other end of the distribution, firms sometimes find that their worst customers actually cost more to serve than the revenue they deliver. These unprofitable customers actually detract from overall firm profitability. The firm would be better off if they had never acquired these customers in the first place.

Challenges

The biggest challenge in measuring customer profitability is the assignment of costs to customers. While it is usually clear what revenue each customer generated, it is often not clear at all what costs the firm incurred serving each customer. Activity Based Costing can sometimes be used to help determine the costs associated with each customer or customer group. For components of cost not directly related to serving customers, the calculation of customer profit must use some method to fully allocate these costs to customers if the total of customer profit is to match the operating profit of the firm. If the firm decides not to allocate these non-customer costs to customers, then the sum of customer profit will be greater than the operating profit of the firm.

Cautions

Like other profit measures, customer profitability is historical. It is a financial summary of what happened in a previous period. And although the past is often indicative of the future, it is easy to imagine situations in which relationships that were unprofitable in the past might become profitable in the future (and vice versa). The forward-looking measure of the value to be derived by serving a customer is called customer lifetime value. Unprofitable customers can have high customer lifetime values (and vice versa).

The ABCs of unprofitable customer management

Michael Haenlein and Andreas Kaplan (2009) propose a six-step approach for dealing with unprofitable customers, a framework they refer to as the ABCs of Unprofitable Customer Management

  • Step #1: Avoid their acquisition in the first place
  • Step #2: Bear in mind potential rescue operations
  • Step #3: Catch the possibility of abandonment
  • Step #4: Draw up a cost—benefit analysis
  • Step #5: Ensure familiarity with your environment
  • Step #6: Facilitate biting the bullet

Other sources

  • Haenlein, Michael and Kaplan, Andreas M. (2009), “Unprofitable customers and their management.” Business Horizons, 52 (1), 89-97.
  • Kaplan, R.S. and V.G. Narayanan (2001), “Measuring and Managing Customer Profitability.” Journal of Cost Management (September/October): 5-15.
  • Pfeifer, Phillip E., Haskins, Mark E., and Conroy, Robert M. (2005), "Customer Lifetime Value, Customer Profitability, and the Treatment of Acquisition Spending," Journal of Managerial Issues, 17 (1), 11-25.
  • Helgesen, Ø. (1999) "Customer Accounting and Customer Profitability Analysis - Some Theoretical Aspects and some Empirical Evidence", SNF Working Paper, No. 67.

Wikimedia Foundation. 2010.

Игры ⚽ Поможем сделать НИР

Look at other dictionaries:

  • customer profitability — UK US noun [U] ► the difference between the profit made from a customer and the costs involved in getting and dealing with the customer over a particular period: »Customer profitability analysis gives an organization the essential information for …   Financial and business terms

  • customer profitability analysis — CPA The analysis of profits by customer. In the past, management accounting reports focused exclusively on product profitability, but in recent years it has become clear that managers need to understand both product and customer profitability.… …   Accounting dictionary

  • customer profitability analysis — CPA The analysis of profits by customer. In the past, management accounting reports focused exclusively on product profitability, but in recent years it has become clear that managers need to understand both product and customer profitability.… …   Big dictionary of business and management

  • customer profitability — /ˌkʌstəmə ˌprɒfɪtə bɪlɪti/ noun the amount of profit generated by each individual customer. Usually a small percentage of customers generate the most profit …   Marketing dictionary in english

  • Customer Lifetime Ansatz — Customer Lifetime Value (CLV) ist allgemein der Deckungsbeitrag, den ein Kunde während seines gesamten „Kundenlebens“ realisiert, diskontiert auf den heutigen Tag. Es ist eine Kennzahl aus der Betriebswirtschaft. Neben historischen Umsätzen wird… …   Deutsch Wikipedia

  • Customer Lifetime Value — (CLV) ist allgemein der Deckungsbeitrag, den ein Kunde während seines gesamten „Kundenlebens“ realisiert, diskontiert auf den heutigen Tag. Es ist eine Kennzahl aus der Betriebswirtschaft. Neben historischen Umsätzen wird auch der zukünftig… …   Deutsch Wikipedia

  • Customer lifetime value — Contents 1 Definition of Customer Lifetime Value 2 Calculation in customer retention cases 3 Uses and Advantages of CLV 4 References …   Wikipedia

  • Customer Information File —   Systems consisting of data bases of customer and customer account information. The emphasis is on customer information and not on accounts. The objective of most CIF systems is to focus on information for marketing efforts and customer… …   International financial encyclopaedia

  • Customer satisfaction — Customer satisfaction, a term frequently used in marketing, is a measure of how products and services supplied by a company meet or surpass customer expectation. Customer satisfaction is defined as the number of customers, or percentage of total… …   Wikipedia

  • Customer experience — (CX) is the sum of all experiences a customer has with a supplier of goods or services, over the duration of their relationship with that supplier. From awareness, discovery, attraction, interaction, purchase, use, cultivation and advocacy. It… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”