Customer profitability analysis
Increase your investment returns with customer profitability analysis
Your company's profit is not only dependant on the amount of customers you have, but also the by how profitable these customer relations are. A profitable customer is one who yields a revenue stream that exceeds the company's cost in attracting this customer in the first place by an acceptable amount over time. On the other hand, certain customers actually cost your business more than the revenue obtained from them, effectively detracting from your overall profitability. Your company would have been better off if it had never acquired these customers at all. Customer profitability analysis help you determine the value of your customers, by calculating the difference between the income generated by a customer and the cost involved in that customer relationship.
In essence, customer profitability simply determines the amount of profit you make for a specific customer relationship, but if scrutinised thoroughly this can deliver some useful business insights. You will find that very often a small percentage of your customer base is responsible for a large percentage of your profit generation. By identifying this group of customers, you will know exactly where to apply your investments to cultivate, maintain and grow this group in order to maximise your returns. The opposite is also true. By identifying the relationships that are less profitable, you can avoid costly investments that will not deliver and thereby lower your company’s overall profitability.
Establishing the source of your income is easy, but the challenge lies in determining what costs to allocate to which customer group. More often than not aspects such as marketing and advertising targets a group or groups of customers rather than a single specific customer. Activity based costing could potentially be a useful tool with which to allocate certain costs to specific customers or customer groups. Once you have calculated this, you can easily evaluate your customer investments and the subsequent profitability thereof.
What you need is an integrated solution that accumulates and evaluates all information, simplifying customer profitability analysis significantly. Enterprise Optimizer® from Business Modelling Associates can do this for you by simultaneously considering business processes, customers, products, inputs, constraints and financials. Visit businessmodelling.com for your solution.
