To get clean, high-quality customer data, financial institutions must start by matching and consolidating existing data into a single, comprehensive customer record. This can provide the insight needed to enhance customer loyalty and lifetime value. Processes used within a customer segmentation and profitability solution can take a myriad. Customer Profitability Analysis is a tool from managerial accounting that shifts its focus from product line profitability to individual customer profitability. Activity Based Costing looks at the various cost drivers to accurately isolate costs and determine a product’s profitability. Formula, examples, guide.
By on February 24, 2014 inOver time weeds grow in any garden. In the same way, work their way into your.
To avoid the high costs of low profit customers, you should perform an annual analysis of. Therefore, weed your garden of who are sapping your.Although there are many ways to look at your customer base, some of the factors to consider are sales volume, number of, and average sale per. Looking at this information will not only shed light on those customers who are a drain on company resources, but highlight to sell more to higher customers who have low activity. Analysis of Customer Profitability Benefits 1. The elimination of customers that are costing you money.Sometimes the costs may be indirect. Firing the customers with low is straightforward, but what about the customers that pay a good but require a lot of effort from operations?
Not only do you need to address gross but you need to consider the costs to service that customer. Focus!If you get rid of the clients that are high maintenance, then it frees your organization up to focus on the more profitable. While a successful might be to cross sell additional or services to those clients who value the, another strategy would be to target new customers with the same characteristics as the good clients you have today.
Increased Productivity Across the OrganizationThe benefits of weeding out high-maintenance, low profit customers will reach across the. The sales department benefits by focusing their prospecting on the right clients who value and will pay for the company’s products and services.
Operations and will realize improved in servicing only those customers who are reasonable in their demands for service. No more getting beaten up on margins, “special” payment terms, or Friday afternoon rush jobs!The is the advantage of customer analysis is improved! The two ingredients necessary to grow a company faster.
Customer account profitability (CAP) represents an importantfuture direction of management accounting. CAP provides management with a way toanalyze customer sales to determine if the Company (as a whole) is profitingfrom doing business with a particular customer. Most management accountingsystems today focus on product cost and profitability by department orgeographic location.
Although CAP is a relatively new idea, its theory is simpleand easy to understand. The key idea in CAP is that each dollar of revenue doesnot contribute equally to net income (page 5).Key features of customer account profitabilityFirst, CAP captures and assigns costs to individual customers, notproducts, services or departments. This allows management to determine if aparticular customer is profitable or if the Company should charge a higherprice.Second, CAP analysis can be used at either a very aggregate or a verydisaggregated level. This allows management the flexibility to either analyze aparticular customer or a large group of customers at a time.Third, CAP focuseson multiple products sold to a single customer rather than a single product soldto multiple customers.
This change from a product cost focus to a customer costfocus gives management a clearer picture of downstream costs that are customerspecific (i.e. Customer service, marketing, and distribution). This allowsmanagement to strategically select which customers to target.Differences in customer profitability arise from eitherdifferences in revenues or differences in costs. Therefore CAP requires adetailed analysis of revenues and costs by customer. Differences in revenuesarise mainly because of differences in price per unit charged to customers.Several CAP studies have found little economic rationale to discounts providedto customers.
Discounts are often given to customers to meet short-term revenuegoals, regardless of profitability. Differences in customer costs arise from theway customers use the company’s resources. Most of this cost difference liesin the usage of downstream functions such as customer service, marketing, anddistribution. For example, some customers require a lot of customer servicetime, while others require none at all. CAP properly allocates these costs tocustomers who utilize downstream services and offers lower prices to thosecustomers who do not.Challenges to CAP AnalysisThere are some challenges that management must overcome toanalyze customer account profitability.First, management must develop reliablecustomer revenue and customer cost figures.
Most often the reason for unreliableinformation is due to inadequate information systems. CAP requires a system toaccumulate information across all business functions and geographic areas. Mostsystems used today are unable to perform this necessary function.Second, management must recognize and estimate future downstream costs of customers.
Twoareas that are especially challenging are environmental and litigation costs.Simply assuming that future liability costs will be zero can lead to asubstantial overstatement of customer profits. Third, management must incorporate a multi-period horizon into the analysis. Customers that areunprofitable during one period may turn out to be profitable in the long run. Ifmanagement only focuses their attention on current period reports, they maydecide to drop the customer who in the long run would be profitable.The final challenge that management must overcome to analyze customer accountprofitability is to recognize different drivers of customer costs. Originalcustomer profitability reports assume that all costs are variable in the longrun and none of the costs are joint. However, relaxing these assumptions maylead management to more accurate reports.Customer profitability analysis emphasizes the importance ofattracting and retaining profitable customers.
This is still arelatively new area of management accounting, and much research still needs tobe done. However, the underlying principle is simple, each dollar of revenuedoes not contribute equally to net income. Therefore, management should analyzetheir customer base and determine which customers to serve.Related summaries:Guilding, C.
The incidence, perceived merit and antecedents of customer accounting: An exploratory note. Accounting, Organizations and Society27(1-2): 45-59.Howell, R. Customer profitability: As critical as product profitability. ManagementAccounting (October): 43-47.Manning, K. Distribution channel profitability. Management Accounting (January): 44-48.Martin, J.
Product life cycle management. Management And Accounting Web.