Managing Customer

Profitability

Chapter 6
 Customer profitability
Applying ABC to customers or customer
groups
Customer 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
House Depot
Cost per Driver
Activity Driver driver unit 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

 Customer profitability
Financial considerations
Profit
Pareto principle (80/20 rule)
Which customers fall into which group?
A large market share is not always best

Return on sales
Profit (or loss) / sales
 Customer profitability

Customers by profitability Cumulative profit

$900,000
$175,000
$800,000
$150,000
$700,000
$125,000
$600,000
$100,000
Profit

$500,000
$75,000
$400,000
$50,000
$300,000
$25,000
$200,000
$0
$100,000
($25,000)
$0
($50,000)
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Customer Customer
 Customer profitability
When to keep unprofitable customers
New customer
Possibility of converting them to a profitable one
Improve efficiency
Reduce activities
Menu-based pricing
Nonfinancial considerations
Opportunity to learn
Prestige
Entry into new market