Question

a- There appears to be a growing tendency for companies to seek competitive advantage by applying customer focused strategies. This customer focus is evident from a number of companies including customer orientation in their corporate mission statement.

1-Explain the concept of customer profitability analysis. Give examples of cost drivers used in this analysis
2-How does the life time analysis differ from the basic customer profitability approach? Explain
3-Show reasons why might an organization choose to keep an apparently unprofitable customer.
4- Should the company in its customer profitability analysis use activity based costing approach or traditional product and service costing approaches. Explain the reason behind your answer.
             

Answer 1

Answer 1

Customer Profitability Analysis is a method of looking at the various activities and expenses incurred in servicing a particular customer. In other words, it focuses on analyzing profit per customer rather than profit per product.
Customer Profitability Analysis is a tool from managerial accounting that shifts the focus from product line profitability to individual customer profitability.

Customer Profitability Analysis

An analysis of the various activities and expenses incurred in servicing a customer in a given period of time.Calculating Customer Profitability

Calculating customer profitability begins by identifying the various costs incurred specifically in relation to servicing a specific customer or segment of customers.
Example of cost drivers
1) sale order by customer

2)Regularity of customer

3)Number of times customer visit in a month, week etc

4)Profit earning from per customer etc

Answer2

Customer lifetime value (CLV) is one of the key states likely to be tracked as part of a customer experience program. CLV is a measurement of how valuable a customer is to your company with an unlimited time span as opposed to just the first purchase.
Customer lifetime value (CLV) is a forward looking tool – it is a forecast of customer profitability. The marketer will build in various assumptions regarding future revenues, costs and retention into the model to construct a view of customer lifetime value across different customer segments.

Answer3

Reasons for an organization choose to keep an apparently unprofitable customer

1)Customer are the asset of BUISNESS.

2)Organization can convert its unprofitable customers into profitable one.

3)Unprofitable customer can refer your Buisness to other coustmers.  

4)if we lose unprofitable customers it would give chance to competitve buisness to take them.

Answer 4

Company use ABC (Activity Based Costing) in its customer profitability analysis.

Customer profitability reporting, using activity-based costing (ABC) principles, aids in determining which types of customers to retain, grow, win-back, and acquire and how much to optimally spend doing each action.
Benefits that Increase Profitability

The ABC method does this by identifying accurate overhead costs and cost drivers leading to more streamlined business processes. ... They can then streamline these processes by allocating more resources to profitable activities and eliminating practices that are costly and wasteful.