The Importance of Analyzing Customer Profitability
The Importance of Analyzing Customer Profitability
BADM 603
July 30, 2007
Every for-profit business has one main goal: to maximize profits by selling as much of its products or services to as many customers as possible. It seems logical to think that the more customers that a business has, the more profitable the company will be. However, business managers should also be aware that some customers are more profitable to the company than others. Managers should analyze their customers to determine those that are the most profitable, and most important to keep satisfied, as well as those customers that may not be contributing to the profit of the business. Once these customers are determined, a manager can develop strategies to increase the profitability of the less profitable customers while keeping those highly profitable customers happy. This is accomplished through customer profitability analysis.
What is Customer Profitability Analysis? Determining which customers generate the largest profits and are consequently better for the company’s bottom line is critical. In a similar fashion to allocating indirect costs of production to products through activity based costing, customer profitability analysis is accomplished by allocating indirect costs for various services provided when a purchase takes place to the appropriate customer. The indirect costs of serving customers include processing multiple orders when one order for all items could be processed more efficiently; processing returns and/or exchanges; restocking returned goods, handling shipping and shipping charges, the cost associated with transferring product; and costs associated with following up on late paying customers. This allocation of costs through customer profitability analysis allows managers to classify customers into useful categories based on profitability. There is obviously no sense in focusing limited time and resources towards customers that are not profitable.
How is
BADM 603
July 30, 2007
Every for-profit business has one main goal: to maximize profits by selling as much of its products or services to as many customers as possible. It seems logical to think that the more customers that a business has, the more profitable the company will be. However, business managers should also be aware that some customers are more profitable to the company than others. Managers should analyze their customers to determine those that are the most profitable, and most important to keep satisfied, as well as those customers that may not be contributing to the profit of the business. Once these customers are determined, a manager can develop strategies to increase the profitability of the less profitable customers while keeping those highly profitable customers happy. This is accomplished through customer profitability analysis.
What is Customer Profitability Analysis? Determining which customers generate the largest profits and are consequently better for the company’s bottom line is critical. In a similar fashion to allocating indirect costs of production to products through activity based costing, customer profitability analysis is accomplished by allocating indirect costs for various services provided when a purchase takes place to the appropriate customer. The indirect costs of serving customers include processing multiple orders when one order for all items could be processed more efficiently; processing returns and/or exchanges; restocking returned goods, handling shipping and shipping charges, the cost associated with transferring product; and costs associated with following up on late paying customers. This allocation of costs through customer profitability analysis allows managers to classify customers into useful categories based on profitability. There is obviously no sense in focusing limited time and resources towards customers that are not profitable.
How is