Question

Customer Profitability Analysis and Management

How is this relatively new advancement in management accounting potentially a useful and powerful tool? What types of data must be captured and tracked that traditionally was not measured? How would this affect the way we prioritize certain customers vs. others and the way we price and provide services? (Side note: for those of you who travel by air frequently as I do, how does the recent strategy of traditional airlines like American and Delta to offer “Basic Economy Fares” relate to this as a response to low cost carriers like Spirit and Frontier?)

Answer 1

Part1&2: Philips Kotler (1997), defines a profitable customer as “A person, household or company that, over time, yields a revenue stream that exceeds by an acceptable amount the company’s cost stream of attracting, selling and servicing that customer”.

Therefore we define Customer Profitability Analysis (CPA) as the anatomy of the revenue streams and service costs related with customer groups.

Accordingly, Customer Profitability Management (CPM) is a plan-linked method to pinpoint the comparative profitability of different customers or segments of customers, to coil strategies that add utility to most-profitable customers.

CPA & CPM are accounting tools based on the truth that each customer is different. Its value lies in its ability to improve strategic decision making. Thus it is used to help organisations to acknowledge the right data in the contemporary world about how relied they are on the most profitable customers, what percentage of resources are used for different customers, the full cost of mending a customer including loyalty programs, service and returns and which customers are targeted by the peer rivals.

Part3: Organisations that vitalizes their bedrock and revamp their internal operations to compete in the restart will uncover numerous occasions to grow while maintaining a robust bond with their existing customer base. Prioritising customers needs through assessing right technology will reduce the leakages in the system plus pull together cross-functional teams to attract and serve new customers. Also through an expertise CPM & CPA, an organisation will be capable to balance the pricing structure between adopting defensive to offensive pricing strategies, thus enabling an integrated approach of long-term growth.