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Customer Profitability Analysis

1395 words - 6 pages

Managing profitability requires not only a customer-centric focus but also a thorough understanding and effective management of customer profitability. Customer profitability management (CPM) is a strategy-linked approach to identifying the relative profitability of different customers or customer segments in order to devise strategies that add value to most-profitable customers, make less-profitable customers more profitable, stop or reduce the erosion of profit by unprofitable customers, or otherwise focus on long-term customer profitability.

Businesses often employ two systems to make sure business processes run efficiently, Customer Relationship Management (CRM) system and an ...view middle of the document...

ABC can show how products, brands, customers, customer groups, facilities, regions or distribution channels both generate revenue and use company resources.
Traditional cost accounting often supports a 20-80 rule that 20% of the largest customers who purchase the most products, contribute 80% of the profits. Using ABC, analysts have often found that 20% of the customers generate300% of the profits. The remaining 80%of the customers are actually unprofitable and can result in a loss of 200% of the profits. When plotted on a graph, the ‘hump’ of this ‘whale curve’ indicates the profit earned by the company’s most profitable customers. The remaining customers are break-even or unprofitable and bring the overall profit back down to 100%. The goal is to make each customer profitable
Since ABC provides a better understanding of the profitability of products and services, companies have started to use the same approach to understand the profitability of customers. Following an ABC analysis, companies can examine the customer profitability information and determine how to manage customer relationships in order to increase customer satisfaction and the profitability of both individual customers and customer segments. The ABC analysis often provides information leading to such improved relationships that the profitability of both the company and its customers is increased.
Customers do not determine corporate strategy, but their values and expectations for the company’s products and services are influential. Organizations place great value on their customers and depend on them for long-term viability. Customer satisfaction is the perception that the products or services received meet or exceed the expectation of the product or service. However, satisfied customers can also be unprofitable. Individual customer satisfaction does not necessarily lead to customer profitability.

Relationship of the Case to your work experience (banking)
Customer profitability is mostly important for service companies, such as financial institutions, that offer a full line of services to customers. Often an entry product, such as a checking or savings account operates at breakeven or loss levels. The product and its pricing, enable the institution to leverage its relationship with the customer, by selling more profitable financial products and services. For financial institutions, customer profitability is far more important than product profitability because the costs of providing a service product are usually determined by customer behavior.
The two types of customer profitability common in retail banking include current customer profitability and lifetime value. Having a profitable customer is more important than having just a customer. It is a well-known principal that 20% of the customers give 80% of the profits and value. So it becomes even more important to have/retain these 20% customers. Once the customer has been acquired using traditional and non-traditional...

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