What is a customer?
Before going to discuss customer profitability or relationship based marketing usually for that matter, one should have information that who is a customer? And consider it or not, customer likely means dissimilar things to dissimilar people inside your company.
So it is evident that we had best figure out what we mean by “Customer” before we get started. To offer some supervision on this rather thorny issue we advise this guideline: a customer should be a purchasing decision unit. What this means in the context of your business may require some careful thought.
Once you have defined who your customers are, the next issue that pops up is whether or not you can actually recognize them in your data. You need the ability to say which transactions and accounts relate to a given customer or you cannot achieve an actionable view of their behavior and it’s implication for profitability of your company. This is usually achieved by establishing a customer hierarchy within your database.
Creating a customer hierarchy is a technical issue, usually resolved by building a Customer Information File (CIF) which cross references customers however defined to accounts and transactions. Many companies use House holding algorithms to achieve a similar matching of customers to business activity. Both CIF development and House holding methods are substantial topics that we will leave to a separate discussion. Suffice it to say, it is very difficult to proceed without a reliable customer hierarchy if you want to measure customer profitability. If you need any help regarding to customer profitability then please contact financial advisor Birmingham Al.
When the foundation is launched then the next big question arises: what is profit anyway? There is an understandable answer – it is profit minus costs. But which revenues and which expenses to include and when to include them is not at all clear when we take a closer look at your customers’ behavior and your business.
These are not trivial or easy questions to answer. The decisions you put together concerning the treatment of individual profit and cost items will have intense impact on the absolute profitability measurement consequences and the relative profit ranking of your customers. Customer profitability amount is not the simplest thing to execute, yet many leading companies have overcome the challenges that it presents. Why would you want to go through the effort of figuring all this out and building (or buying) a system to do it?
Why should we measure it?
We gladly admit to having a prejudice towards measuring customer profitability at a basic level we thought that what gets measured gets handled. Organizing value exchanges with your customers as a strategic process is just as appropriate now as it was when CRM was first advertized as the next great thing. What Customer profitability adds to the mix is an understanding of what pays and what doesn’t.
We were once asked to revamp the compensation program for a commissioned sales force. At the time, the 100 or so sales people were producing a considerable negative net present value to the company. The solution we developed was to retarget the sales on which commissions were paid: the rate of commission was built on a sliding scale related to the profitability of the business generated. The outcome was a turnaround from loss to revenue to the tune of numerous million dollars a year (NPV). At the heart of the analysis was an understanding of customer profitability.
It is quite clear that acquiring profitable customers is a key to managing the margin and the bottom line of your business. Devoid of a restraint analysis of the profitability of your existing client base it is very thorny to tell which types of customers you should be identifying for achievement. The other entire target marketing information you presently use stays valid and useful, the difference is you learn which customers you want to obtain.
To have knowledge of customer profitability allows your company to manage and reimburse the sales function for delivering value to the organization, rather than profit or unit sales.
To avoid entering into a debate over the difference between sales and service, we will define service as providing fulfillment of the sales promise to your customers. Each industry is different in the way it provides service to customers but it is invariably an activity that provides value to your customers and cost to your organization. One of the key issues in managing service is the allocation of costly resources to customer service rationally.
Understanding customer profitability offers a myriad of opportunities to you for managing the effectiveness of the resource allocation decisions you make concerning service. The key to affecting service level decisions knows two things: who you are affecting and how much change you can afford. Measuring customer profitability can aid you to respond both of those questions with facts.
Product management is as essential as a discipline in a customer centric organization as it ever has been. Product managers have commonly been blessed with admittance to some form of product profitability measurement which notifies their management processes and thinking. Consequently, we rarely see product managers emerging as the proponents of customer profitability in companies. We believe this is ill-fated, as there is certainly opportunity hang about in this information for the product manager too.
Operations management is largely concerned with optimizing processes to achieve efficiency and effectiveness. This management challenge inevitably results in substantial change as new technologies and practices are adopted. One of the numerous insights that customer profitability can give is to highlight which customers are influenced by changes and the risk that the organization is taking by executing operational changes. This is critical when evaluating risk and when communicating to customers about changes the company is implementing. Another important way that customer profitability can be used in operations is in the evaluation of which processes and procedures are adding value to the company. Ultimately operations processes can and should be measured in relation to customers and customer value.