Question

1. Discuss the challenges while reviewing customer profitability using the whale Curve. Illustrate your answer with examples

Answer 1

Challenges while reviewing customer profitability using whale curve :
* Revenue and gross margine are inadequate for identifying individual product or customer profitability .
* True profitability analysis (TPA) has become a critical tool that product management leaders can implement to help executives ,managers and sales identify their profitable , neutral and unprofitable products and clients. The TPA further highlights drivers that produce these outcomes.
* To analyze the drivers of net income , its important to calculate - at the item level - the volumes , prices and cost of goods sold.
* This leads to gross margin and sums to gross profit. But to arrive at net income , we must assign the variable ,semi fixed and fixed CTS of invoice line items based on the products and customers served .
*Activity based costing (ABC) establishes the real cost assigned to individual invoice transactions for a given time.
* The CTS of products or customers results from a combination of inherent factors ( rather than individual behaviourial choices ) , the resulting support cost they incur and the company's decisions about the efficiency and cost of performing those activities .
* Product or customer factors ( eg a product's sourcing and delivering cost ) tends to be fixed or stable over time.
* Behaviour tends to be affected by a vendor or clients operational choices .
* It also is crucial to identify nature of such costs - fixed , semi fixed or variable .
* Fixed costs do not change proportionally as a function of broad cahnges in volume.
* Semi fixed costs vary when specific step level volume changes are triggered .
* Variable costs change quickly and proportionally to ales volume .

USING THE WHALE CURVE
Pareto principle also known as the 80/20 rule ,defines the tendency in large , when it comes to customer and product profitability ,The paretoo Principle broadly fails to account for the true underlying economic levers in business .
Once operating costs are asssigned to individual customers and products , the results can be illustarted in a graph depicting order , the net profit of all customers and products .
* The Chart often called the whale curve because of its resemblance to a whale braeching
See FIG 1
In a whale curve , customers or products are ranked by profitability from highest to lowest.
The X axis plots customer or products while the Y axis reflects accumulated profit .
Within a smaller sample (eg - a sales territory ) , the ranges can be substantially higher .
The data also can be presented to focus on either profit makers or profit takers.
The overall whale ratio and its distribution and variability becomes a critical operational set of metrics to identify where and how to remediate underlying drivers . It also guides the restructing of businesses cost structures and growth targets and provides a way to align organizational resources to maximize profitable growth.