Measuring and Managing Customer Profitability

The only value a company will ever create for its shareholders and owners is the value that comes from its customers – current ones and new ones acquired in the future. To remain competitive, companies must determine how to keep customers longer, grow them into bigger customers, make them more profitable, serve them more efficiently, and target acquiring more profitable customers.

But there is a problem with pursing these ideals. Customers increasingly view suppliers’ products and standard service lines as commodities. This means that suppliers must shift their actions toward differentiating their services, offers, discounts, and deals to different types of existing customers to retain and grow them. Further, they should concentrate their marketing and sales efforts on acquiring new customers who have traits comparable to those of their relatively more profitable customers.

Some customers purchase a mix of mainly high-margin products. However, after adding the non-product related costs to serve for those customers apart from the products and service lines they purchase, these customers may be unprofitable to a company. This is because they demanded extra services that caused greater expenses than low demanding customers. How does one properly measure customer and supplier profitability? How does one deselect or “fire” a customer?

As companies shift from a product-centric focus to a customer-centric focus, a myth that almost all current customers are profitable needs to be replaced with the truth. As just noted, some high-demanding customers may indeed be unprofitable! Unfortunately, many companies’ managerial accounting systems aren’t able to report customer profitability information to support analysis for how to rationalize which types of customers to retain, grow, or win back and which types of new customers to acquire.

With this shift in attention from products to customers, managers are increasingly seeking granular nonproduct-associated costs to serve customer-related information as well as information about intangibles, such as customer loyalty and social media messaging about their company and its competitors. Today in many companies there’s a wide gap between the CFO’s function and the marketing and sales function. That gap needs to be closed!