Customer Profitability Analysis 15 1 Customer profitability analysis
Customer Profitability Analysis 15 -1
Customer profitability analysis � Comes under Supply chain management (SCM) �One of the key feature of SCM is; ---------------------------------� Managing suppliers � Supplier selection, supplier costs, supplier profitability and supplier performance measure � Managing inventory � Economic order quantity (EOQ) � Just-in-time systems (JIT) � Managing customers � Customer profitability analysis, customer performance measures � Managing time � Measures of time 15 -2
Managing customers �A key aspect of SCM is the effective management of customers. �Many organizations are placing increasing importance on improving customer relationships and enhancing customer value. �This requires the organization to work towards better understanding & satisfying customers’ specific needs. 15 -3
Managing customers (cont. ) �Customer relationship management (CRM) 15 -4
�An effective CRM can lead to ; �CRM involves � Type of data to be collected � How such data can be made available for real time use across organization. 16 -5
Customer profitability analysis �----------------------may be used to determine the profitability of customers. �Customers can be identified as cost objects & ABC can be used to estimate the costs. �Customers may be grouped by Size, Industry, Market or Distribution channel. Eg: In Food Processing Industry=> group customers by Distribution channel => distinguishing between Supermarket chains (Arpico, Cargils, Keels), independent grocers, smaller outlets (24 hour convenience stores) 15 -6
Customer Profitability Analysis For various reasons, some customers are less profitable than others. For Example Using ABC to determine the activities, costs, and profit associated with serving specific customers. Customer makes frequent order changes. Customer needs special parts. Customer is difficult to please.
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How do we define customer groups? �Marketing managers often identify the customers of their business as belonging to certain segments �These segments determined by considering similarities & differences in customer buying behaviors & customer preferences �Until recent years marketing mangers have analyzed Sales & estimated Profitability of different customer segments �But now ; ------------------------------------------------------------------------------------------16 -9
Customer cost analysis 15 -10
Customer profitability analysis (CPA) �CPA helps marketers & business owners to understand net profit coming from each individual customer. �CPA consists in the individual customer NP OR Revenue – all costs & expenses associated with particular customer �This analysis helps business owners to understand in which customer brings more profit to the company �It drives company profits UP 16 -11
Customer profitability analysis �A comparison of the costs of all the activities used to support a customer or a customer group with the revenue generated by that customer or customer group. �Relative profitability of customers can be determined and used for a range of strategic decisions 15 -12
How do customers differ? � Differences in customer profitability may be due to differences in revenues charged to customers and to differences in resources used (costs) to service customers. � Differences in revenue can arise because; � customers are charged different prices (when they operate in different markets) or � are given different discounts, � sales volumes differ or � customers purchase a range of different products. � Differences in the cost of servicing customers relates to; � Manufacturing costs � Costs of downstream activities � Customisation of products � Marketing and selling activities � Distribution channels � Customer support activities 16 -13
Customer profitability analysis (cont. ) 15 -14
Why calculate customer profitability? �CPA can be used to address questions like; 15 -15
CPA can lead to interesting findings… �A manufacturing co. may find that it is more expensive to deal with small individual customers than with large distributors �So management may decide to encourage the smaller customers to purchase from the distributors rater than buy direct from the manufacturer. �This may help co. to improve its cost performance relative to its competitors �Also manufacturer may search other avenues to reducing costs of servicing the smaller customers without reducing the level of service. 16 -16
CPA can lead to interesting findings…(cont. ) �CPA provides a different perspective on the profitability of the business and �Allows managers to take strategic decisions like which customers, markets, distribution channels to focus on… �It also helps to identify areas of cost control & cost reduction 16 -17
Calculating customer costs �ABC technique can be used to determine customer cost �Identification of customer-driven activities is important to assign costs to customers accurately. �Three levels of customer-driven activities and costs �Order level activities �Customer level activities �Market level activities 15 -18
�Customer performance measures �Market share �Customer retention �Customer acquisition �Customer satisfaction �Customer profitability 16 -19
Calculating customer costs (cont. ) 15 -20
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