Customer profitability: Liz Murby explains why a strategy of keeping every one of your customers satisfied is unlikely to optimise your bottom-line results.

AuthorMurby, Liz
PositionTechnical matters

The goal of business is not to improve customer or employee satisfaction at any cost, but rather to manage these relationships and the drivers of customer profitability to improve corporate performance. The maximisation of profit and shareholder return is best achieved through the effective management of a company's relationships with each of its customers. In order to do this, the company should identify the most and least profitable elements of its total customer base (and those in between), and manage these relationships accordingly. Customer profitability analysis (CPA) is the first stage in this process.

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Although they are clearly a significant source of income to companies, customers are equally the cause of various costs--for example, marketing, delivery, after-sales service and payment collection. Where all customers not only buy a similar product but also share the total servicing costs equally, the profitability of each customer (income less costs of service) is identical. In reality, of course, this is seldom the case. Companies generally offer a range of different products and services, while their customers' responses are similarly divergent.

Long-term, effective and profitable customer relationship management is an imperative which demands that companies do the following:

* Understand the concept of customer profitability and conduct CPA.

* Maintain and improve customer profitability.

* Convert unprofitable customers into profitable ones.

Meeting the first of these challenges requires a clear understanding of the causes of both revenues and costs. Strategic cost management tools such as activity-based costing (ABC) facilitate this understanding. Essential components of the drive to increase customer revenues and decrease customer costs include the following:

* An analysis of the cost of customer service (through ABC, for example).

* The measurement of the lifetime value of a customer to the company.

* The development of profitable, long-term customer relationships for increased corporate profits and shareholder returns.

Improvements in IT have allowed organisations to develop closer relationships with their customers. Companies are able to interrogate large databases of customer information and identify groups of people with similar attributes. By matching marketing expenditure against the anticipated reaction of identified segments of the customer base, they can manage marketing expenditure to optimise...

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