Managing Customer Profitability

Chapter 6

Customer profitability

Applying ABC to customers or customer groupsCustomer is the “cost object”

What activities are performed to service customers?

Can the activities be managed?

What costs are related to serving individual customers or groups?

Customer profitability

Activity DriverCost per

driver unitDriver units Cost

Sales calls # of sales calls 53$ 6 318$ Contract negotiations Negotiation hours 210 2 420 Order processing # of orders 450 11 4,950 Order picking # of line items 6 128 768 Shipping Pounds shipped 8 1,520 12,160 Customer training Training hours 150 6 900 Total support cost 19,516$

Post-sale customer support Support hours 90 4 360$

House Depot

Customer profitability

Financial considerationsProfit

Pareto principle (80/20 rule)

Which customers fall into which group?

A large market share is not always best

Return on salesProfit (or loss) / sales

Cumulative profit

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Customer

Customers by profitability

($50,000)

($25,000)

$0

$25,000

$50,000

$75,000

$100,000

$125,000

$150,000

$175,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Customer

Prof

it

Customer profitability

Customer profitabilityWhen to keep unprofitable customers

New customerPossibility of converting them to a profitable one

Improve efficiencyReduce activitiesMenu-based pricing

Nonfinancial considerationsOpportunity to learnPrestigeEntry into new market