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Customer Profitability Analysis Insights

This document discusses how customer profitability analysis can provide useful insights for a solar panel company. It calculates that the company's individual customers are more profitable than its small/medium enterprise customers due to lower servicing costs. This analysis contradicts what traditional sales metrics might suggest and allows the company to focus on retaining more individual customers or reducing costs for its SME segment. While customer profitability analysis has limitations, emerging techniques using big data and predictive analytics can provide more accurate lifetime customer valuations.

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Srinivasan Narasimman
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104 views3 pages

Customer Profitability Analysis Insights

This document discusses how customer profitability analysis can provide useful insights for a solar panel company. It calculates that the company's individual customers are more profitable than its small/medium enterprise customers due to lower servicing costs. This analysis contradicts what traditional sales metrics might suggest and allows the company to focus on retaining more individual customers or reducing costs for its SME segment. While customer profitability analysis has limitations, emerging techniques using big data and predictive analytics can provide more accurate lifetime customer valuations.

Uploaded by

Srinivasan Narasimman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

How is customer profitability impacted by Marketing, Selling, Distribution, and Administration Cost

allocation/trailing mechanisms? Is it possible that ostensibly high price paying customers are actually not that
profitable? Discuss examples from your industry and experience on such possibilities

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.

For example, a solar panel company serves two types of customers: Individuals and Small Medium Enterprises
(SMEs). For the attainment, servicing, and retention of its customers, the company is required to provide
consulting and service visits, as well as process sale orders. Individuals require only one site visit before placing
an order.

SMEs require more frequent visits, as they are based in multiple locations and are provided with after-sale
service as part of the bulk purchase. The customers’ behaviour and profitability are given by the following
table:

Application of Customer Profitability Analysis

From the given example, the customer profitability of the Individual segment exceeds the SME segment. This
insight then supports the company in its strategic decisions. It can shift its focus towards attracting and
retaining more customers from the more profitable Individual segment. Alternatively, it can look for cost
reduction approaches for its SME segment.

Potentially, it can work to redesign its purchasing process in order to reduce the frequency of visits or orders.
Otherwise, it can look to charge its customers for additional service visits to shift the weight of the cost from
the company to the customer.
Benefits of Customer Profitability Analysis

These insights might not be attainable from traditional reporting methods. In a company’s income statement,
there is no granularity provided in the calculation of its Selling, General, and Administrative Expense line.

One of the most common marketing metrics of sales per segment may also be misleading. If the company
reported 120 customers in the Individual segment and 80 customers in the SME segment, managers might
believe that SMEs contribute to two-thirds of their annual sales.

Sales by Segment

33%

67%

Individuals SMEs

By following the Pareto 80-20 Rule, they conclude that they should focus on this smaller group of customers
that contribute to a larger share of annual revenue. However, as we know from the added analytical
granularity offered by the above Customer Profitability Analysis, they would then be allocating more resources
to a less profitable customer segment.
Sales by Segment

37%

63%

Individuals SMEs

By examining Customer Profitability rather than just sales, the company will gain a more accurate insight into
which customer segment is the stronger driver of its overall profitability.

Criticism of Customer Profitability Analysis

The biggest criticism regarding Customer Profitability Analysis is the selection of a limited time frame and
segmentation criteria. However, with the emergence of Big Data, customer profitability can be calculated using
new methods that determine a customer’s lifetime value rather than just the sales within a restricted time
frame.

Additionally, with respect to segmentation, predictive analytics will be able to estimate the value of individual
customers by identifying drivers in behavioural patterns rather than just the value of the average customer in
its respective segment.

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