Customer Profitability Analysis
Customers purchasing the same products and services interact with a business in various and at times very different ways. No two customers are the same. They differ in a number of ways including identity, values, preferences, perception, needs, wants and many other variables. Hence, to a business they’ll drive multiple means of revenue and extract unique costs. No two customers will incur same costs and give you same profits.
This takes us to Customer Profitability. The specific amount of profit you stand to gain from each of your customer groups or personal. It measures how profitable a specific customer is. The metric compares how much revenue a given customer generates with the company’s spending on acquiring or retaining that customer – in time, resources, or other costs.
Hence, the net gain to a business after a series of interactions with a specific customer within a given period.
Customer Profitability Analysis is detailed, labour-intensive and difficult to implement. It offers insight into your customer base and earning potential that other equations, analysis and processes can’t.
Certain metrics can give you a rough baseline picture of Customer Profitability. These metrics range from calculating revenue generated by each customer to Customer Lifetime Value.
Research evidence suggest that 80% customers give an organization 20% profits and 20% customers give an organization 80% profits (Pareto Rule). Further researches concluded that 20% customers give an organization 80% profits, 60% of customers, gives an organization 40% profits and 20% customers, gives an organization 20% negative profits (Nkosi, 2020)
Understanding which customers stand to make you the most money can inform intelligent, strategic business decisions across your company.
For example, knowing the 20% customers making 80% of your profits, demand that you come up with strategies to deepen relationships with those customers. As for the 60% customers, you come up with strategies to increase share of wallet. These customers are profitable to you and your competitors, hence strategies designed to push them to your side are advocated. The 20% giving you losses should be encouraged to go elsewhere. You can achieve this by charging them a premium and appear price uncompetitive in their minds.
Customer Profitability Analysis is an essential tool for managers looking to improve their business’ Profitability. By understanding the Profitability of their customer base, managers can make informed decisions about allocating resources, improving customer retention and loyalty, and optimizing pricing strategies.
