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Most of these expenses are independent of the volume and mix of products that
the company produces, so that they cannot be traced through causal
relationships to products
Metrics such as gross margins and product-line profitability can appear in the
financial perspective of the Balanced Scorecard (BSC), while the process
perspective can include metrics related to the costs of production and
purchasing processes.
if the only info that managers have about customers is financial performance,
then they may take actions that improve financial performance in ST but
damage LT customer relationships need both financial and nonfinancial
metrics to manage their performance with customers.
Gene believed that carver was more profitable customer than Delta, because
Carver ordered few products in large quantities, placed the orders predictable,
and required little sales/technical support. However, Delta placed many small
orders for special products, required expedited delivery, and used many
technical resources.
When Gene launched an ABC tudy of the companys MSDA costs, he developed
capacity cost rates for all resourcs in the support departments (ex: accounts
receivable department). He estimated time demands on various resources o
obtain/process orders, distribute orders, and serve customers.
Gene found that Carver was more profitable than calculated in his previous
report, which allocated MSDA costs as a fixed % of revenues.
Companies can make money with high CTS customers/ lose money with low CTS
customers, but the info on MSDA costs incurred for each customer is vital for
effective mgmt. of customer relationship
when companies rank products and customers from highest volume to lowest,
they find that their top-selling 20% of products/customers generate 80% of total
sales
The most profitable 20% customers generate about 180% of total profits
(peak above sea level) the hump of a cumulative profitability curve
generally gits 150-250% of total profits by 20-40% of most profitable
customers
Least 20% profitable customers lose 80% of total profits some of the
largest customers fall on the far right-hand side of the curve because theyre
among the most unprofitable. This is because small customers dont do
enough business with the company to incur large losses. Only large
customers demand high discounts and make demands on technical, sales,
etc. resources.
Large customers are usually the most profitable or the most unprofitable,
rarely in middle.
offer discounts, incentives, and special services to retain the loyalty of these
valuable customers
Customers like Delta appear on the right tail of whale curve, dragging
profitability down to sea level with low margins and high cost to serve
unpredictable order patterns, small order quantities for customized products,
nonstandard delivery requirements, & demands on technical/sales personnel.
The opportunity for a company to identify its unprofitable customers and the
transform them into profitable ones is perhaps the most powerful benefit that
managers can receive from an ABC system.
Measuring revenues and costs at customer level provides the company with
more relevant info than at the product level certain customers demand more
than others
Examine internal operations to see where they can improve to lower costs
Ex: if most customers are migrating to smaller order sizes, strive to reduce
costs of setup and order handling so that customer preferences can be
accommodated without raising overall price
3) Enhance the customer relationship to improve margins and lower the cost to
serve
o
Before taking action with a customer who has an unprofitable effect on one
product line, managers should understand all relationships it has with that
customer, and act on the basis of total relationship profitability, not just
based on profitability of a single product
Pricing waterfall: chart that shows many revenue leaks from list price
cause by special allowances/discounts to build customer loyalty
Each small discount seems like small concession to get the order, encourage
sales, and receive prompt payment but can actually lead to huge revenue
leaks from original list price
accumulates enough volume to qualify, and its not linked back to individual
transactions that qualified for volume discount
o
Now, more common to calculate income for every quarter for every customer
Profitability depends on whether and how much the net product margins
recover customer-specific costs. Mapping customer profitability:
The y-axis = gross margins from all products sold to the customer net
revenues minus discounts/allowances minus all costs of production for that
customer in that period from ABC system; represents cost of actual
demands of resources to produce products for that customer
X-axis = sum of all MSDA costs to serve the customer and processing orders
Top left: price insensitive; demand few discounts, low cost to serve
customers best type!
Bottom left: company can make money with highly discounter customer, as
long as cost of servicing that customer is low large purchasing volumes
may > low prices
Bottom right: problem because theyre large customer who demand big
discounts and lots of customized services and technical support right hand
edge of whale curve try to move these customer to breakeven point or
profitability through menu-based pricing, product mix rationalization,
elimination of discounts/allowances, and standardizing packaging/distribution
o
Salesperson Incentives
Instead of having to repair damages from unprofitable customers, it would be
better to avoid them in the first place these unwanted customer relationships
occur because salespeople have incentives to generate sales, not profit
because of commissions and minimum quotas
Companies now use info from ERP (enterprise resource planning) and CRM
(customer relationship mgmt.) software systems, to base salesperson incentives
on order and customer profits & sales
Life-Cycle Profitability
By knowing the characteristics of profitable customers, companies can direct
their marketing efforts/resources to specific segments that are most likely to
yield profitable customers
Due to high acquisition costs and time required to establish a good relationship
(ex: multiple product offerings), even attractive new customers may initially be
unprofitable
assumes that you can estimate retention rate (r): probability of retaining a
customer
customer lifetime value strategy: service companies invest money into new
customers because they want to become the lifetime provider for these
customers as they get good jobs and become successful company should
track each customer
1) initial acquisition cost
2) profits/losses earned each year
3) any additional costs incurred to retain the customer each year
4) the duration of the relationship
Some banks have analytic systems that allow them to estimate these
parameters based on the demographic characteristics of a potential/new
customer guide the banks promotion strategies and campaigns to attract
customers with the highest expected lifetime value.
Another measure = % customers from previous period who make at least one
purchase per year
1) Satisfied customers: measure = how well their expectations are met per
transaction/LT relationship
2) Loyal customers: measure= customer devoting an increasing share of wallet
for repeat purchases
3) Committed customers: purchase frequently from supplier and tell others
about supplier
4) Apostle customers: committed customers who have credibility when they
recommend to others
5) Customer owners: take responsibility for continuing success of the
suppliers product or service
o
Net Promoter score (NPS): helps measure whether customers have moved
beyond stage 2 above
o
A score of 1-6 means the customers are detractors: can harm reputation
and brand value
Quite a few companies have negative NPSs, and since 2002, the average
NPS has dropped < 10%