Customer Profitability

CUSTOMER PROFITABILITY ANALYSIS: CHALLENGES AND NEW DIRECTIONS

Summary

This article presents the concept of modifying cost accounting system in order to provide measurements from a customer profitability viewpoint. Most management accounting systems focus on products, departments or geographical areas, which have little to do with customers. A questionnaire was sent to marketing managers and marketing controllers and interviews with respondents. Much of this article draws on qualitative responses given in these interviews and questionnaire.

There are different degrees of focus at the lowest level individual customers at a more aggregate level focus on group customers and also focus on different distributive channels.

Why CAP is used is because "each dollar or revenue does not contribute equally to net income." Difference in customer profitability can arise from many differences-

1.) Revenue difference- difference in price charged per unit to different customer, differences in the selling volume levels across the customer etc.

2.) Difference in cost - this difference arises from the way customers use company's resources.

3.) Difference in distributive channels

4.) Difference in customer service level

The key features of analysis of customer account profitability

These factors make CAP distinctive-

1.) it follows through the entire value chain

2.) it focuses on the multiple transactions of a customer

3.) it emphasizes multiple products that a customer purchases

4.) it can separate costs so that they are customer specific

5.) It can be kept at a highly aggregate level or brought down to a very granular level of individual level.

Challenges in developing customer profitability information

1.) How to develop reliable customer revenue and customer cost figures - this challenge can be categorized into two problems first customer revenue analysis which means tracking customer revenues involving variety of challenges like different distributive channels, multiple names and codes etc. the other problem is customer cost analysis which involves with tracking customer costs involving challenges like data not collected by customers, lack of source records, allocating costs etc.

2.) How to recognize future downstream costs of customers- usually companies emphasizes on cost incurred in the current period